Baby Got Check!

Even before I write this post, I know I’m gonna get some flak from the hardcore fiscals out there.  I’m not gonna sugar coat it, I’m just gonna say it: “I like getting a FAT tax refund!”

I like big refunds and I cannot lie
You other brothers can’t deny
When a girl walks in with an itty bitty check
But a big refund in your face
You get sprung!

Wanna add up tough
Cuz that return you know is stuffed
Deep in the forms she’s preparing
There’s a fat check ready for tearing
Oh, FAT check, I wanna get with ya
And take my picture
Holding you so closely
Cause the zeros you got
Make Me so cozy
Ooh, April refund
You say you wanna buy the sun
Aw hell no, hell no, you’re gonna pay off my creditcard loans

Okay, I’ll stop.  ;)

First of all, why is getting a big tax refund a bad thing?  Well, if you work for a company who gives you a W-2 each year, you’re aware that they take a certain amount out of your paycheck, depending on how many withholdings you take, to go to the government in income taxes.  They do this automatically and EVERY paycheck so that the government has a steady stream of income to use on its many programs.  However, you MIGHT not make as much as you predicted over the year, so when tax time comes and you calculate the actual amount of taxes you owed the year before, if it is less than what you paid, then you get a nice refund check back.

You’re probably gathering why getting a check back is a bad thing.  That means that you gave the government an INTEREST FREE LOAN of YOUR MONEY for up to 12 months before they gave it back.  This is money that could be working FOR you in the markets or in CDs or helping to pay bills or paying down principles on your loans.  Basically, they’re stealing your money, then you have to prove through your tax return that it is your money, then they say oops and write you a check.  I get it.  I know that I should alter my exemptions so that less is taken out and I get paid more each check.  But I don’t.  Why?

Would I Really do anything Fruitful with the Money?

The whole reasoning behind having fewer withholdings is so you can keep your money and have it work for you throughout the year.  So let’s ask ourselves: “Would I actually do anything with that money?  Would I put it in an interest bearing savings account?  (have fun with your 0.7% interest)  Would I put it into an IRA and buy stocks with it?”

If I’m being honest with myself, I know I wouldn’t do any of that.  I buy and sell stocks twice a year, once in the spring and once in the fall; with maybe a little dabbling here and there.  I’m not the active trader who watches CNBC all day long.  I’m in it for the long term, so I pick stocks that I think will perform over the long haul.  Recently, I’ve been getting into dividends, but that’s another topic.  Maaaaybe I’ll make another purchase or sale based on what’s going on in the market, but I’m not actively watching.

I contribute one lump sum of $5,000 a year (or whatever the limit happens to be) to my ROTH IRA.  I like to keep things simple.  I could contribute a little each month and buy stocks throughout the year, but again, that’s more of a headache than it’s worth to me.  And I would rather have LOTS of money to contribute and trade ONCE, with ONE trade fee rather than many over the year.

If we’re talking savings accounts, let’s see how much that would come out to.  On average, my tax refund is three to five thousand dollars each year.  Let’s say best case scenario, I put all $5,000 into a savings account and by some magic, that is all compounded over the entire year at a miraculous 1% interest rate.  By the end of the year, I would have a whopping $50 extra in my bank account.  For me, that’s simply not worth the trouble.

What are the chances that I would just Spend it?

So the extra money is not going to do much work for me, so what will I do with it?  Probably blow it somewhere.  Ever notice how your room always gets filled up with clutter?  Even when you move to a bigger place, for some strange reason, you feel the need to fill up any empty space with more stuff.  It’s basic human nature to use the resources we have.   This is another reason why I’m against raising taxes.  I think the government should take a look at their spending, just as we do in our private lives before they raise taxes.  Sorry, got all political there.

If I’m making more each month, then I’ll think I have more resources to spend and am more likely to spend that money, whereas before, when the government was holding onto it, I had no way to spend that money, cause I no longer had it.

It’s a nice buffer at the beginning of the year.

We all make mistakes.  I don’t always stick to my budget, I try but sometimes there’s a lull in paychecks or I didn’t quite make the goal I had set for myself.  Getting an extra five grand at the beginning of the year is a nice booster.  It fills in the gaps where I missed expenses and it just makes me feel better knowing I’m not as bad off as I thought I was.

Even though all the financial experts out there will tell you to lower your withholdings so you can get the most out of your pay check, I say NAY NAY!  Let the government hold onto the money for a bit, keeping you from spending it when you shouldn’t and just enjoy the nice lump sum at the beginning of the year.  It’s always a good feeling to get that check in the mail.  This method is a combination of emotion and math.  The math says I lose $50, but the emotion says I gain a sense of security and support, and I value that a lot more.

Do you get a large tax refund?  Do you regret it or revel in it?

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