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Why You Shouldn’t Worry About a Big Tax Refund

If you follow personal finance blogs, you will notice that a lot of them give the same tired advice. One of those pieces of advice is “stop giving the government an interest free loan!” They tout the benefits of keeping the most money in your pocket as possible, and go on and on about how you should set up your deductions so that only the bare minimum is taken out. That advice is rubbish.

How Big is the Average Tax Refund?

For most Americans, a hefty tax refund is expected. And most American’s get to enjoy a check from Uncle Sam every year. The average is right around $3,000. That’s not a lot of money, but it is pretty sizeable. It means that you are paying about $115 extra every two weeks, and the government is holding onto that money before returning it to you. Sounds like a raw deal right? You’d rather have that money so you could invest it, or save it, or pay down some debt right?

Likely, you wouldn’t do that.

Big Refund versus Higher Paycheck

The consensus is split on which is better. And it all depends on your goals and what you want to do with the money you get back.

A higher paycheck sounds like a good idea, and you may have big plans to invest the money or at least save it in a savings account. But likely, if you get an extra $100 every pay period, you will spend an extra $100. You will find something to buy, eat out more often, get an extra drink at the bar, or anything but actually save the money.

A bigger refund, however, is easier to save. When all of the money comes in at once it is harder to spend it. So out of your $3,000 you can dump $2,500 into savings and still have $500 to blow on stuff that you want to buy. Your savings will end up higher than if you tried to save throughout the year.

But I Miss Out on Interest!

The average savings account yields around .5% interest right now. Let’s suppose you were able to put the entire $115 into savings every paycheck. That would mean you earned around $15. Even less because the full amount of money wouldn’t be in there from the start. Taking the time to save every pay period gets you a whopping $15 extra at the end of the year. Most likely you won’t put all that money into savings.

Save All at Once

Instead of trying to save every pay period, just let that big tax refund come in. Your savings and investments will be better off because of it, and you will never miss those few extra drinks at the bar, that extra night on the town, or that new pair of shoes every month. If you hire an accountant, you can get that refund even bigger too.

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