Say no to cashing in that tax refund check. Here’s why.

Are you excited for tax time for the sole purpose of cashing in that big refund check? In some scenarios, getting a large tax refund may not really be in your best interest and is actually taking money out of your pocket.

The Government is borrowing your money interest-free.

No, you aren’t reading that wrong. Each time you receive a tax refund in the spring, you are lending your money to the government with no interest. There are not even many banks that would allow such a generous business deal with mortgages or personal loans. You shouldn’t either. Lower your deductions and receive more money in your paycheck each week, which will put that money to better use and budget it to increase personal wealth.

 

Don’t miss out on wealth-building profits.

If you lower your deductions so that at tax time you are breaking even, this puts more money in your pocket every other week of the year. Use these extra funds to build wealth and increase your net worth.

• Pay down debt. Reducing debt leads to less interest each month to lenders, which means you will pay less money over time.
• Automate savings. Whether it’s a 401(k) or an IRA, or even a non-retirement mutual or index fund, invest that extra money. These funds will grow and work for you as each month passes.

 

You might blow the whole thing on something stupid.

Large windfalls like a tax refund check can too easily be seen as “extra” money. This could lead to frivolous spending on something that you don’t really need or won’t benefit you in the long run. Instead of being tempted to blow the whole thing, break up the amount and put it back into your paycheck where it belongs.

 

When can a tax refund be a good idea?

There are some rare cases where situating your deductions to get a large refund is beneficial. Some find that it is hard to discipline themselves and set up an automatic savings plan and worry that they may end up blowing the extra money that comes in their paycheck each week. The large refund is really only worth it if you’re certain that that money will be used for wealth building.

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