Tax season means you’ll either be getting money from, or paying money to the IRS. Conventional financial advice says that you should adjust your tax withholdings to where you don’t have to pay taxes out of pocket, but you also aren’t getting a big refund either. Where’s the fun in that? Opponents of a tax refund make the argument that you are just making an interest free loan to the government. That argument made a lot more sense before both interest rates dropped, and getting more than 1% on your savings account was something to take pride in.
When it comes to taxes, I’ve been on both the paying and receiving side. I definitely prefer receiving (my) money (back) from the IRS. The biggest advantage of receiving a refund is it allows you to jumpstart or accelerate progress toward whatever financial goal you are working on. Sometime it can feel like you are making no or very slow progress on your goals. An extra $2,500 at tax time can really move the needle on your goal.
You might be wanting to fully fund an emergency fund, pay down debt, max out an IRA, beef up your investment accounts, pay for car/ home repairs, etc.. As long as you are using the refund in a responsible manner, and not to finance needless consumption, a refund can be a tremendous benefit. It really helps get momentum going towards your financial goals. If you are a very diligent, aggressive saver then receiving a large refund may not be that big of a benefit. You would have most likely saved the extra money, if you had less taxes withheld from you paycheck (resulting in a lower refund). Smart financial decisions aren’t always entirely based on the numbers. The psychological boost you can get from receiving a tax refund and using toward your goals can outweigh the “sacrifice” of an interest-free loan to the IRS.
A few months ago, you probably weren’t even thinking about or expecting the money from the tax refund. Now that you might be getting a refund, don’t act like you can’t live without the money. This tax season, instead of blowing your refund on something you don’t need, use the money to make progress towards your financial goals.