Getting a Tax Refund? Not a Good Idea

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If you are getting a Tax Refund from Uncle Sam thisemergency at any time during the year.
year, here's something to think about...Some people treat their annual refund check like
Ask yourself, "Do you like getting a refund?" If you do,lottery winnings, something "extra". Maybe you were
you're looking at this the wrong way. That refund isplanning on spending your refund for a night on the
money you gave to the government that you didn'ttown. That says you don't see the refund money as
have to give them.being as precious as the other money you have been
Did the government pay you interest on that refundscraping together to pay off your bills. Unless you have
amount? No, they didn't. But if you had put that moneysavings for an Emergency Fund and have all your
in an interest bearing bank account you would bedebts paid off, you can't afford to simply spend the
getting a small amount of interest paid to you. Interestrefund on having a good time.
rates on savings aren't that good right now, so this isn'tThis brings me back to the thought that maybe getting
such a big deal. But, if you are also carrying a balancea tax refund isn't a good idea. If your income is a
on a credit card that charges you 25% interest, that ispredictable routine paycheck, you can adjust your
a big deal. Rather than loan the money to theclaimed deductions on your payroll calculations to
government for free, you could have used it to paymake sure you pay the government "just enough" to
down your debt and avoid some interest costs.cover your taxes due. This will increase your
So, a refund for $500 might look like a lucky break untiltake-home pay. Later, when you see how much the
you look at it like this:increase is, you have two good ways to use the
Routine payments of $41.66 a month will amount tomoney you had been giving to Uncle Sam. One use is
$499.92 after one year (12 payments). If you get ato put that same amount into a savings account (using
$500 refund, this explains where it came from. Youautomatic deposits from your paycheck). This savings
gave it to the government when you didn't have toaccount can be a growing Emergency Fund, or a
during 2009, and now they're giving it back to you.college fund for the kids, or even savings for a
If you had instead used that $500 to pay down debtvacation. The other use is to pay off debt. Paying off
on a credit card charging 25%, you would havedebt is the best use of this money because it reduces
avoided interest charges of $73.15. Effectively youthe money you "lose" when you pay interest, and
could have paid off $573.07 of debt on your crediteventually you will pay off your debt. Then you can
card. That reduction in debt would mean your currentput that money into savings.
interest charges would be reduced by $11.94 eachIf you're getting a tax refund this year as in years
month.gone by, quit loaning your money to the government
Now that you're getting the refund, what are you goingwhen you can use it better yourself. Ask your
to do with it? Some people treat their annual refundemployer how to make an adjustment in the number
check like a savings plan. Maybe you have plans toof claimed dependents used to calculate your tax
use that money to buy clothes, or for some neededwithholding. Then use this year's refund to get a
work on the car. Clothing and car maintenance arehead-start on paying down debt, or building your
things that should be planned for in your householdsavings, like I described above.
budget. And what if you needed the money beforeThis action can be part of your personal Economic
tax time rolled around? If you had saved your moneyRecovery Act.