Getting a tax refund.  It’s the best; like an unexpected blessing from the government.  NO!  Let’s clear up some misnomers regarding a tax refund.  First of all, a refund is NOT a bonus.  It’s NOT a gift from Santa Claus.  It’s NOT a present from the tooth fairy.  It’s NOT a sign that you’re running your finances well.  Actually, it’s the OPPOSITE.  It’s YOUR money the government is now giving back to you.  That’s IT!

The average family living paycheck to paycheck (which is 70% of Americans by the way) gets a $3000 tax return.  That’s $250 a month they are letting the government hold onto interest free.   If you’re struggling to get an emergency fund together and/or pay off debt, you need that money!

If you’re receiving a tax refund every year, adjust your withholding.  This can easily be done by chatting with your HR department.  Shoot for a zero return.  Now, come tax time and don’t have to pay nor receive a refund, meaning you paid the exact amount of income tax, is quite unlikely.  But, getting a refund of thousands of dollars is a bad financial plan.

Let’s debunk a few statements I often hear.  Number one: “I want to get a big return so I make sure I don’t owe”.  Here’s the deal, you owe all year long.  Every time you get a paycheck, your employer takes out income tax.  Don’t fool yourself that you’d only owe at the end if you don’t get a refund.

Here’s another statement: “A tax refund is like a savings account”.  Trust me, there are SO many better places to put your money (like under your pillow).  Not that saving accounts are paying much interest these days, but the government doesn’t give you even a little extra for borrowing it at the end of the year.

If you do get a refund, don’t blow it.  That’s YOUR hard-earned money.  Apply the money to the “Baby Step” you’re on.  If you’re trying to get your $1000 in the bank (“Baby Step” 1), use your refund there.  If you’re working to pay off all your debt except your mortgage (“Baby Step” 2), throw it there.  If you’re saving to get a fully-funded emergency fun in place (“Baby Step” 3), put it there.

Photo: Flickr