Soon you’ll be receiving your W-2’s, 1099’s or mortgage interest statements in the mail. You’ll take your shoebox full of receipts to your accountant, then a short time later a nice tax refund will show up in your checking account.
Taxes (Photo credit: Tax Credits)
WAHOO!?!?
Of the 143 million returns filed in 2011, more than 80% qualified for a refund.
The average refund in 2011 was $2,913. *
I promise this isn’t going to be an article all about how “you just gave the government an interest-free loan for the past year“. I know you’ve heard that before so I promise this article will be more valuable than that.
But first, let me get something off my chest:
YOU ARE GIVING THE GOVERNMENT AN INTEREST-FREE LOAN!
2012 is over which means there’s little you can do to change whether or not you receive a refund (talk to your accountant about some of the steps you can still take). Instead, let’s focus on 2013, discuss your options, and explore why it’s better for you not to get a huge refund next year. Give me a chance to try and convince you that your refund may not be leading you to financial success.
The #1 reason people choose to get a refund:
They use the tax refund as a simple “savings plan” to get money back each year.
When I discuss the tax refund with people, I often hear-
“If I get it in my paycheck, I’ll just spend it.”
or
“I won’t save anything otherwise.”
Does that sound like you? Are you shaking your head “yes” right now?
Your intentions with your tax refund may be honorable.
84% of Americans intend to pay down debt, save, or invest their windfall.^
Unfortunately, 60% of Americans do one of the following instead:
-Make a major purchase
-Go on vacation
-Pay for everyday expenses
In other words, it’s not likely that you will actually save your tax refund. Nor will you save yourself interest by paying down your debt.
You will spend the refund, not save it.
Based on everything above, you end up spending your money at one time in April or spending it throughout the year! And that is why I don’t think you should simply change your withholding without some sort of plan! That’s not exactly going to work out to your benefit either.
Don’t jump ship from one bad habit to another!
Let’s assume you’re receiving a refund of $3,000 this year, that translates to $250/month or $125/paycheck (if paid twice per month).
If you changed your withholding tomorrow to start seeing this bump in your paycheck,how can you ensure you won’t spend it?
SOLUTION #1
Change your direct deposit at work forcing this amount to a savings account. Most companies allow you to choose multiple accounts for your direct deposit. Keep the same amount going to your checking account as normal, but put the difference in a savings account, preferably one that is not easy to access. Consider an online bank such as ING or Ally, which usually takes a few business days to get the money.
SOLUTION #2
Create an automatic, recurring payment to your debt for this amount. If you’re expecting $250 more each month in your checks and your goal is to pay off debt, immediately create a systematic payment from your checking account directly to your debt. (Try this exercise- determine how much interest you paid on $3,000 this past year – that’s the cost of waiting all year to pay off the debt).
SOLUTION #3
Call your Financial Advisor. Your advisor can open a savings account for you that’s not as easy to access as the one at your bank tied to an ATM card. Be honest with your advisor. Tell him/her exactly what you want to use that money for and ask them to hold you to it. You have to call them in order to transfer the money which may be just enough to prevent you from trying.
Change your habits in 2013 and try something new but remember- don’t go from one bad habit to another! Call me if you have questions about your particular situation!
Thank you for reading!
^SOURCE: http://www.bankrate.com/finance/taxes/how-americans-will-spend-their-tax-refund-1.aspx
Taxes are complicated and very unique for each household. Consult your tax advisor or call me to discuss the strategy best for you!
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