Getting a Tax Refund This Year? Don’t Feel Bad!
This article may contain references to some of our advertising partners. Should you click on these links, we may be compensated. For more about our advertising policies, read our full disclosure statement here.
There’s a lot of bad financial advice that gets repeated year after year, and – unfortunately – financial advisors are some of the worst offenders.
I can’t tell you how many times I’ve interviewed money managers who swear that you should never, ever pay off your home, for example. Their reasoning? Interest rates are cheap, and you can earn more money in the stock market over time. Some “experts” also tout the benefits of deducting mortgage interest on your taxes without realizing that a) the tax benefit only goes to people who itemize, and b) the benefit is only for amounts over the standard deduction.
Obviously, I think this advice is awful regardless. After all, some people don’t want to spend a lifetime in debt. The fact that the standard deduction was bumped up to $24,000 for married couples filing jointly in 2018 also means that even fewer people will be itemizing when they file their taxes this year.
I’ve also had financial advisors tell me that whole life insurance is a great deal and that variable annuities are the best way to build long-term wealth. I’m so glad I work online so nobody has to see my facial expressions when I hear this stuff!
3 Reasons Getting a Tax Refund is Not the End of the World
Another piece of well-intentioned guidance I hear repeatedly (especially after the new year) is that one should never, ever receive a tax refund.
“You’re giving the government an interest-free loan,” financial advisors love to say. They suggest taking that money and stashing it into a high interest savings account instead. Then, you’ll have the cash you need to pay the tax man if you wind up owing money.
While this advice isn’t as offensive as some other crap I hear, it’s still pretty narrow-minded and often short-sighted.
Yes, you would be better off saving your extra money in an interest-bearing account and you should try not to get a huge refund. However, it’s probably not a big deal if you get money back after you file. Here’s why.
1. Forced savings is better than no savings
Saving money is easier for some people than it is for others. It’s a piece of cake to save when you earn six figures and don’t have kids, for example. But, what if you have a large family or you don’t earn a lot? What if you have a chronic medical condition and face a barrage of medical bills each year? What if you just suck with money?
For some, forced savings is the way to go because it doesn’t give them a choice. This is why saving tax-advantaged dollars in an employer-sponsored retirement plan like a 401(k) is such a good idea. The money is gone before you even see it, so you simply learn to get by on less.
The same concept applies to prepaying your mortgage. The extra money you pay in becomes a sort of forced savings until your home is eventually paid off.
While a lot of people say they would never pay off their mortgage early because they can “earn more in the stock market,” many of the people who say that sort of thing don’t actually invest their extra money. Stating they can “get better returns elsewhere” sure makes them feel smart, but they don’t actually practice what they preach.
The bottom line: If setting yourself up for a tax refund each year is the only way you can save money, that it’s probably better than nothing.
2. The average tax refund is less than $3,000
Also, remember that the average tax refund is around $2,900. That’s not chump change by any means, but it’s not enough money to make anyone rich over the course of a year.
If you followed your financial advisor’s advice to put that much money in a savings account at the beginning of the year and your account earned the average rate of .01%, you would earn approximately 29 cents after year one! 29 cents!
Even if you opened my favorite high-interest savings account with CIT Bank to earn 1.00% APY, you would still only earn a little bit more.
Now, don’t get me wrong. Earning $50 or so for the year is not that bad. Again, it’s certainly better than nothing.
The point is, most people are not receiving tax refunds that will lead to life-changing earnings over the course of a year. If we’re talking about $100,000, then yes, invest that money to get the best return possible. If your average refund is between a few hundred and a few thousand bucks, it’s not going to make a huge difference.
CIT Bank Savings Builder account! That is one of the highest rates available today. Use the link above to learn more.– Earn up to a 1.00% APY with a
3. Owing money can hurt your finances if you don’t expect it
If you don’t have a huge emergency fund, owing money to the tax man can actually be a huge financial hardship. That’s why many people prefer to adjust their withholdings so they’re withholding slightly more than they owe each paycheck. With this strategy, they can hedge their bets and make sure they aren’t hit with a huge surprise bill.
While it’s a smart idea to have an emergency fund stocked with three to six months of expenses at all times, the reality is that most people don’t have this much in savings — or any savings at all.
A 2018 report from the U.S. Federal Reserve showed that 40% of Americans don’t even have $400 to cover an emergency expense. Telling these people they should make sure they never “give the government an interest-free loan” at the risk of actually owing money is pretty preposterous. When you’re living life on the edge, it’s actually smart to try and prevent a situation where you suddenly owe hundreds or thousands of dollars.
Getting a Tax Refund? Don’t Spend it! Do This Instead.
I guess my point is that, if you’re getting a tax refund, you don’t have to feel bad. It’s not the end of the world, and at least you don’t owe anyone.
With that being said, you should absolutely make sure you’re using this year’s refund to better your financial situation. If you set yourself up for a refund so you can splurge for a fancy vacation or buy new furniture, then you’re not really helping yourself.
If a refund is on its way this year, we suggest using it to build or establish an emergency fund. Our favorite savings account for e-funds is the CIT Bank Savings Builder account since it offers 1.00% APY with a minimum deposit of $100. To keep that rate, just transfer at least $100 in savings to your account each month. The CIT Bank Savings Builder Account is also fee-free, so it’s a no-brainer for most people.
You can also use your refund to pay off high-interest credit card debt. Considering the average credit card comes with an APR over 17%, this could make a huge difference in your finances both now and later on.
Whatever you do, don’t be too hard on yourself. Getting a tax refund is not the end of the world — especially if you can use it to your advantage!
Are you getting a tax refund? Why or why not?
Disclaimer: Comments, responses, and other user-generated content is not provided or commissioned by this site or our advertisers. Responses have not been reviewed, approved or otherwise endorsed by this website or our advertisers. It is not the responsibility of our advertisers or this website to ensure that all comments and/or questions are answered. Club Thrifty has partnered with CardRatings for our coverage of credit card products. Club Thrifty and CardRatings may receive a commission from card issuers.