tax refunds? why you shouldn't be getting one

Since I've received my old w-2s finally, I guess I'll say something semi-related to my actual job instead of ranting aimlessly on the grave political conundrum we're in.

Here's my point. Tax refunds. The average for 2005 was roughly $2400. This is of dire concern to me. There are many reasons why giving the government an interest free-loan is a stupid idea (not the least of which is what they do with the money when they get it). But lets have a look at what could be done instead.

First of all. There is a large segment of the population who somehow believes this money is the government giving them a check. There are some people for whom this is true. They are mostly totally broke (EIC) however, so we'll ignore them. For most people it is the government returning funds that belong to them as though they sat in a wallet and were suddenly found at the end of the year. This does not mean it is free money, it is a refund. 'Refund' implies you paid them too much money, not that they are giving you money. If you paid at a restaurant or store too much you would expect the cashier to give you your change right then and there, at least I would, not we'll mail this to you in about 8 to 10 months.

Second. Its is not a savings program. If you want savings, take the $2400, split it into 12 months and put $200 in the bank every month. The bank pays you for your money. The government does not. This is not a savings program. It is your money being held hostage for 12 months. A decent online bank nowadays pays at least 5% interest. Which, over $2400 means at least an extra $120 dollars on top of it. 2520 is greater than 2400 last time I checked. This doesn't sound like much, but you could also put it to work in other ways.

What do most people do with the money? Well, they either blow it (vacation!) or spend it on bills. Bills like credit cards or loans. Hmm. They charge interest don't they? What if you used the $200 each month instead? Well, that saves you interest every time. Paying a lump sum if you have low or no interest on them is probably ok. But in every case, paying a consistent sum (above the mins) will attack principal and that means less interest is paid over time. Which means you're in debt less and end up paying less (alot less). I can run people through the numbers, but in general, you're better off having the disciplined attack than taking the lump sum. Interest payments destroy your earnings potential. Only a mortgage is deductible, the rest should be avoided like plague if at all possible.

There are a variety of side effects to this also. A person who disciplines themselves to use the money for good effect each and every month develops a habit of saving or at least of paying loans prudently. The lump sum can be shown in the effects on lottery winnings. Many lottery winners blow the winnings in under 5 years (and this is including people who get the money over many years). Millions of dollars just thrown away; makes me angry to think of it. People don't deserve power if they can't use it responsibly. I'll take the disciplined person over time over a lottery winner any day.

One other note. If you go through a tax service, don't get the money advanced to you. They charge about 2000% interest. If thats the case, who cares if you must wait an extra 2 to 3 weeks. If you're smart you have the money direct deposited anyway and only wait a week or two.

This does not mean you shouldn't pay only the amount you owe. If the government owes you some money back, take it (something like 100,000 people a year don't claim their refunds). But for next year, get set up so you can keep your money and put it to work. You can go to about a 10% underpay without penalty, but shoot for as close to zero as possible for the safe play. Otherwise, you're sending them a check every April 15th which isn't exactly fun either.