For many young people, getting a big tax return is like Christmas in the Spring- a windfall you can use to pay off debt, invest, or throw at a big-ticket item. A lot of people treat it like found money, or a fun, beginning of the year bonus. Except it’s not. When the IRS gives you a solid chunk of change (and the average tax refund is about $2,800), what they’re really giving you is your money, back, after an entire year of using it interest free.
That’s a whole bunch of money that never needed to be withheld from your paycheck in the first place. Keep that extra couple hundred dollars in your paycheck and you can make time and interest work for you. Considering how people most commonly use their tax refunds, it’s crazy not to.
- A full third of people receiving tax refunds in 2015 planned to put at least part of that refund into savings. This is a noble goal, though poorly executed–instead of languishing in the government coffers, your money could be building up interest in your savings or as an investment all year long. Furthermore, even people who intend to stash away their tax refunds in savings do typically end up increasing their spending, anyway, if unintentionally. If they’d accumulated that wealth throughout the year rather than all at once they’d be less tempted to indulge after receiving their return.
- The same is even more true for individuals intending to use their refunds to pay back debts. Throughout the year, credit cards, student loans, and any other sort of debt will accumulate interest. Giving the government a couple hundred dollars a month to hang onto rather than putting it toward the principal of those debts means you’re getting slapped with those interest fees when you could have been paying it off.
If you’re planning on putting your tax return into savings or paying off debt, hey, at least you’re not going shopping–but next year, try not to give Uncle Sam an interest-free loan that comes out of your pocket.