There is a reason that furniture and car dealerships will offer to do your taxes for free. They want their hands on that REFUND
I, like most people, used to love a good tax refund. A couple of grand in late winter, all at one time, that I could actually DO something with! Sa-weet!
Let me tell you all the reasons why this was a bad idea and how it kept me from using my money more wisely.
According to an article at Money.com entitled The Great Tax Refund Debate: Is Getting a Big Check from the IRS Smart or Dumb, by April of 2019 about 100 million US Tax payers had received an average refund of more than $2,700 from the IRS. That is a lot of money!
Let’s use a simple example. You overpay your taxes by $100 per month, resulting in a $1,200 refund that you collect in March. (you procrastinate, but you aren’t THAT bad)
Here are the things you CANNOT do with that money along the way and what it cost you:
If you have $5,000 in credit card debt that you pay $100 per month towards. Paying an extra $100 per month would save you about $2,500 in interest over the life of the debt.
Let’s say you are debt free so that money was “extra”
You can build up an emergency fund during the year so if you need access to the funds you have it. That will save you in potential credit card interest should something come up.
You are 28 years old want to save as much as you can to retire. You put money into your 401k at work, but don’t have a ROTH IRA. Using that $100 per month in a ROTH IRA assuming a 7% rate of return you will have added $205k to you retirement savings by age 65. Depending on your lifestyle, that could be a few years of retirement spending. Maybe the difference of retiring at 63 and not 65.
Let’s assume you BLOW it – that is still better than letting Uncle Sam use your money for free!