People get so excited about their tax refunds at the end of the year. They all have plans for the funds, some financial, like paying off debt or saving for retirement; some for fun, using the money for family vacations or shopping sprees.
However they spend the money they all share one thing in common: they are all making a very typical personal finance mistake. They are having too much money withheld from their paychecks resulting in an interest-free loan to the government.
Instead of receiving a couple thousand back after April 15th, could you use the funds throughout the prior year? Most people would say yes.
Some argue this is essentially forced savings for them because they don’t have the discipline to save themselves. While this is understandable, it isn’t financially beneficial.
By paying what you should be paying throughout the year, you will receive more in your paycheck and you can use these funds to pay down debt, saving you interest expense.
You could also invest the money for retirement or your children’s education. By doing this with each paycheck you are dollar-cost averaging and in good years your growth is compounding on itself. All better options than using one large chunk from a tax refund.
If you haven’t reviewed how taxes impact your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ to get started.