It’s refund season, and while getting a tax refund seems exiting because you get a lump sum of cash, getting a refund is not necessarily a good thing. Of course you don’t want to owe a huge amount to the government either, but if you estimate your tax and subsequent withholding or payments correctly throughout the year, it is much more beneficial to owe a tiny amount or receive a tiny refund. Here’s why.
If you get a large refund, the government does not pay you interest on this money. Most people nowadays realize that a refund is simply an interest free loan that you gave to the government. The government charges you interest if you don’t pay your full tax liability by a specified time so it doesn’t make much sense to loan money to them without charging interest. The average return for 2014 so far is around $2,800 to $3,000. That is a good chunk of money that you could have spent on something else.
One obvious option is to save that money. Average savings account interest rates are around .06% which isn’t much but either way it would still be more than you’d be earning on your interest free loan to the government. However, it is possible to find accounts with very good interest rates all the way up to 1%. Banks such as Ally Bank or Synchrony Bank offer very high interest rates compared to the average. Throughout the year you could save you extra money in these accounts to earn interest. Additionally, you could put your money into CD which usually earns higher interest than a savings account. You could also invest in various stocks, municipal bonds, or savings bonds to name a few. All of these options could potentially increase you earnings without lifting a finger. It is kind of like getting free money! However, some options come with certain risks so it is important to determine the type of return you are hoping for with amount of risk you are willing to take.
Saving or investing your money is not the only option. You could also choose to pay of debts with you extra income. The average household credit card debt is approximately $15,000. In 2014, the average credit card interest rate was around 15%. However some credit cards can be in the 20% range. This means your credit card can accrue a huge amount of interest the longer it takes to pay it off. Instead of paying in unnecessary money to the government, you could put the extra money you have throughout the year to paying off your debts.
If you are fortunate enough to not have any debts like the rest of us do, and you feel that you save enough money already (there’s no such thing as too much saving, in my opinion!), you could buy that new outfit or gadget you have been wanting! Instead of waiting until the government decides to give you back your money, you could have your desired item much sooner! Lastly, if you are terrible at saving, and you’ll simply spend your money as soon as you see it, it may just be best to treat your refund as a savings account. This isn’t advisable since there are so many other options to earn a bigger return on your savings, but if you feel this is the best option for you, then go for it!
Leave comments below with any other ideas you may have!