Sweet tax refund

It’s the tax season again in US.  If you are expecting the sweet tax refund checks, probably you can’t wait to file the tax returns.  Yeah, the tax filing offices are lit up again.

The long-forgotten tax accountants are back.  They are smiling, and counting the extra dollars in their pockets.  As the mid April deadline is approaching, they are becoming the most beloved professionals in this country.

Very soon, we are going to see those hard working people on the curbs of busy streets.  They are either lifting up the big signs with tax business names, or simply dress up with the unique costumes to solicit tax business.

The weather is still not that warm in February and March in Central Ohio.  Standing there for 8 hours, dancing around against the wind, the people always remind me that, life is tough, and making money is hard.

Okay, finally you got the tax refund.  What are you going to do with it?  What should you do?

I saw many people who squandered the $4000 or $5000 refund within a month.  Yes, within a single month.  Can you believe that?  They go to the malls, fancy restaurants, vacations, and spend like a millionaire.  They live like there is no tomorrow.

But tomorrow does come.  At the end of the month, they are back to square one.  Bills are unpaid, and money is short for kids’ necessities.  Washer is broken, and they are scratching the head where to get the money to buy a new one.

I hope you don’t live that way.  It is too stressful.  You and your family deserve much better than that.  Let’s figure out how the tax refund should be used.

Save 100%:

I suggest you save 100%.  This is why:

For bonus, it is something extra, and unexpected.  It’s okay if you want to splurge a bit, and I suggest maximum 10% of the bonus.  Save the rest of 90%.

The tax refund is different. 100% should be saved.  It’s your own money.  Over the year, you overpaid the tax through the payroll.  The refund is just getting your own money back from the Uncle Sam.

If you get too much refund, probably the best way is to adjust your W-4 form with the HR.  In this way, every month you’ll get a little bit extra on your paycheck.  What should do you with the extra money?  Save it, and invest it.  Spending is not an option.

For some people, the temptation is always there.  Not touching the money is hard.  If that’s the case, don’t put them into your checking account.  Hide them into your savings account, somewhere you don’t see it often.

At the end of the day, we should treat money in a responsible way.  If we could not control the impulse, how could we help our young kids to learn the money management skills?  Kids are watching every step we do.

The family finance matters a lot in the long run.  Continuously saving and investing is the only way to get to the financial independence.

Save 95%, and splurge max 5%:

If you can’t live without touching the tax refund, splurge no more than 5%.  The hard limit has to be set.  So, for $4000 refund, you can spend max $200.

Is $200 a lot of money?  Yes.  If your hourly wage is $10, assuming your effective tax rate is 20% (including Social Security and Medicare tax, federal, state, and local tax), you’ll have to work 25 hours.  That would be 3 long days, plus one more hour.

With the new technology, it didn’t make it easier to earn the money.  But it made the spending so easy.  Just swipe the card, or one click on the internet, the money is gone, forever.  Why rush?  Slow down, my friend.

My point is:  money is so hard to make.  Once the money is in your pocket, use it wisely and consciously. Spending without a thought is not a responsible behavior, unless you have tons of money.

In my case, I don’t remember the last time to get a tax refund.  It must be a long time ago.  To me, working on the tax return is not exciting.  Usually in late March, I start collecting the tax forms, and work on the hassles myself.  Try to wrap up everything in two or three days.  At the end, I’m just sick of the tedious forms, and tell them:  “bon voyage”, and “see you next year!”

Have you filed the tax returns for 2017?  Are you going to get the sweet tax refund?  What’s your plan about the money?

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10 Responses

  1. GYM says:

    I like doing my own taxes! My sister in law who is an accountant took over my taxes since I got married. I do enjoy the tax refund though, and I usually save it, I don’t usually spend it.

    • Retire Early Helen says:

      That’s wonderful, your sister-in-law helps you on the tax returns. Every time when I hear from someone, who is saving their tax refund, I’m so happy for them. They’ll see the benefit of saving in the long run. The only losers will be those stores and businesses, who won’t see the money spent there. We all should take care of ourselves first, instead of helping stimulating the economy by over spending.

  2. Steve says:

    Helen, I think you should save 100% and let it compound. I try to minimize a tax refund so I don’t lend the government money for a full year interest free and if I owe them money at tax time that’s OK.

    • Retire Early Helen says:

      I totally agree about your 100% saving approach. Adjusting the tax withholding, so people don’t overpay the tax too much during the year. Some folks feel the tax refund is free money, actually it’s not. The mentality needs to be changed, so they can save and invest it properly.

  3. Bob says:

    Well we usually get a tax refund and yes I invest it immediately. But it seems that everyone is hardwired a little differently and your right most people have it figured out what they are going to buy even before they do their taxes. My mind doesn’t work that way and a lot of other people find value in things, whereas I value my freedom the highest. I often times think I am weird because I think differently but it is nice to read blogs written by like minded people.
    Good article

    • Retire Early Helen says:

      Saving the tax refund is good, and investing it is even better. It needs some discipline. Quite a lot of people love the material stuff, and it seems they can never get enough. The combination of over spending and limited income could put them into a financial mess. I like the word “delayed gratification”. It’s not against spending. The purpose of saving and investing today is to be able to spend and enjoy it later when needed. Financial freedom is priceless.

  4. Caroline says:

    I love doing tax returns! I am even considering doing it as a side hustle next year:)
    If I get a tax refund, I feel I didn’t do a good job and gave the government money I should have invested earlier.
    Of course, any small refund goes directly into my investing account.

    • Retire Early Helen says:

      Wow, definitely you can get some tax return preparation business if you love doing it. Many people like me consider it as a chore, and want to avoid it if possible. Very good point, don’t let the government take the cash advances from our pocket with 0% interest rate. Glad to hear that, most of our readers are savers and investors.

  5. Joe says:

    We finally got all our 1099 and I’ll work on our taxes next weekend. I’m pretty sure we’ll owe around $5,000 this April. The blog income was much better than expected.
    I agree that people should save 90-100% of their refund. It’s found money and best put toward savings. You can put it straight into the Roth IRA and forget about it.

    • Retire Early Helen says:

      That’s great, your blog income was better in 2017. Hopefully it exceeds your expectations in 2018 as well. Roth IRA is a great vehicle. Invest it every year, and let it grow over time.

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