It’s Actually Good to Get a Tax Refund

Most articles that I read and financial writers that I respect claim that it’s not good to get a tax refund. The general consensus is that you wouldn’t want to give an interest free loan to the government. After all, the government already has tons of money. Why would it need more of yours?

And I completely see their point. In a perfect world, I would use the money that I could have gotten as a tax refund every single month. Instead of getting $1,200 back from the IRS, I would take $100 extra per month and use it to pay down my debt, invest, or save for a big purchase.

I certainly would not want to leave this money in a savings account with the government that earns 0% interest.

Again, in a perfect world, it would not make sense to get a tax refund from the government.

The psychology behind the tax refund

The main problem with not getting a tax refund is that we aren’t perfect when it comes to our finances. Instead of investing our extra $100 per month, we may just spend it. Then when April rolls around we would have little or no extra savings and would be wishing that we had a tax refund to look forward to.

As you know, the best thing about a tax refund is that it acts as a forced savings account. I know that the interest rate on this savings account sucks, but it is still forcing us to save money. Perhaps having a little bit less money flowing in each month will cause us to rethink larger purchases and not be so eager to spend money on smaller stuff throughout the year.

For instance, it is probably easier to spend money if we have $200 in our wallet then if we have $20 in our wallet. Maybe this same concept of lifestyle inflation works with our taxes. If we have an additional $100 each month, we may just inflate our lifestyle by that same amount and have no extra investing or savings to show for it.

Again, you may be disciplined enough to save this extra amount. However, most of us are not!

As a matter of fact, for many people, this tax refund may be the only time that they save money throughout the year. Especially for a lower income family, a tax refund can can be used as an opportunity to get out of some debt or just to make some necessary purchases.

Making the tax refund beneficial

In order for the tax refund to actually be beneficial, we must be careful to use it correctly. We can’t just put it into our bank account without a clear, concrete plan of how to use it.

If it just becomes extra money that we put into our bank account, then it may be gone. Almost like we never even got it.  Lifestyle inflation anyone?

Of course we would spend it, which can be fine … but we would probably spend it without a plan. After getting our $1,200 tax refund, we would look up 1 month later and find that there wasn’t anything to show for it.

I guess that we got some new work boots and went out for drinks a few times with the guys, but our $1,200 would be gone!

Instead, we must make sure that we have a plan for our tax refund even before we get it.

Do we need a new mattress? Let’s spend our tax refund on it instead of going into debt.

Are we trying to pay off our mortgage? $1,200 may not feel like a lot, but it would actually knock $1,789 off of our mortgage loan after 10 years have passed or $3,976 off after 30 years (assuming a 4% interest rate).

Do we just want to get some clothes and a new dining room table? Even though these might not be needs, at least we could point to them and say that our tax refund helped us to purchase these items.

Whatever we decide to do with our tax refund, we have to make sure that we are intentional with it.

Sure it may be better to spend the refund on paying down debt and investing, but having a plan for the tax refund is the key!

My tax refund

Typically, my wife and I often don’t get a tax refund because of our extra side hustle income. However, this year we are going to be getting a refund. Just like I suggested, we have already made a plan for what we will do with it. Here’s what we are thinking:

1. There are a few items that we want to get for our house like a rug and some curtains. The tax refund will help with those items.
2. We are going on a two week vacation to Hawaii this year. Although we have used travel hacking and credit card rewards to save over $7,000 on our trip, we still are going to bring a little extra money for the vacation. Some money from the refund will go towards this trip.
3. We will pay down our mortgage. We are getting close to having $50,000 left on our mortgage. Although our mortgage will be paid off soon no matter what we do, we are using the remainder of our money from the refund to pay down our mortgage.

What do you think? Is it actually beneficial to get a tax refund? If you are getting one, what are you planning on doing with it? Let us know in the comments.

And thanks for reading!

~Nathan

Let’s keep living a great life … with the help of money. So what’s next?

• You can travel for free by using rewards credit cards.
• You can get motivated and get out of debt.
• You can check out the next post or the previous post and continue to learn.

But no matter what you decide to do, let’s leave the ordinary behind and take action today!