Why Tax Refunds are Bad


Last year, my husband and I were helping some friends work their way out of a difficult financial position. Their home was nearing foreclosure and they were robbing Peter to pay Paul on all their other bills. This was a painful, emotional and difficult experience but also one that brought to light how important it is to make sure you claim the correct amount on your W-4 at work.

You see, with a couple hundred extra dollars per month, our friends could have kept their heads above water and ridden out the dip in hours at work. They thought they were doing everything right by working two jobs, eliminating daycare expenses and having a family member watch the kids, not eating out etc. When a major part of the puzzle was a simple as bringing home a bit more of their hard earned money each month.

Guess what, they were very excited to get a $4000 tax return, even though it came too late. If you break down the tax return, that’s an average of $333.33 per month that the government borrowed interest free instead of our friends using it to pay their bills.

Don’t get me wrong, I understand that it’s exciting to receive that deposit in your account each year. I remember when it felt like Christmas to file my taxes and wait for the money to come in. It was like a forced savings account where the savings fairy would drop the money off on the assigned date each year. Until I learned there are much better ways to utilize my money throughout the year. I could put those extra dollars to work paying off debt, building savings for retirement or the kid’s college, contributing more to a 401k or simply boosting our emergency fund.

If you’re ready to keep more of your money in your pocket, then you need to use the IRS Withholding Calculator and figure out your proper withholding amount. Once you’ve done that go to your payroll department at work and ask for a new W-4. Adjust your withholdings and stop lending your money to the government interest free. You’ll be glad you did.


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