In 2018, the average American received a tax refund of $2,727.That’s great right? An extra three grand in everyone’s pocket is certainly better than the alternative, allowing for bills to be paid, an upgrade to the kitchen, new shoes for the kids, and maybe even a quick getaway or spur-of-the-moment vacation.
In total, the Internal Revenue Service sent back $324 billion to taxpayers. That is one massive interest-free loan that the federal government enjoyed over the course of the year. Try walking into your local bank or credit union and asking for an interest-free $324 loan. You’ll be laughed out the door.
The sad reality is that many count on a nice check in the form of the tax refund. Perhaps it is already earmarked for a large expense or it is a viewed as a way to jumpstart a savings plan. We hear these sentiments echoed by clients all the time.
However, sitting down with a tax expert and ensuring the proper parameters and filing is done proactively can ensure that a significantly lower refund is achieved at the end of the year – but with the key caveat of having a little extra each paycheck.
For those looking to jumpstart their savings prerogative, what if instead of relying on a large check to put in all at once you simply bumped up your monthly contributions to an IRA, 401k, 403b or 457? While it is always great to save as much as possible, a multitude of little contributions over time will always outweigh one sporadic large influx.
For those aiming to try and claw away at debt this is even more crucial. According to the U.S. Federal Reserve, the average American household carries $5,700 in credit card debt. That is a large number that doesn’t even include potential student loans, mortgages, medical bills, car payments and more.
Given that your typical credit card charges between 12% to 20% in interest, keeping the outstanding balance as low as possible and always making the biggest payment possible on a monthly basis can save big time in the long run.
Last but certainly not least, having a little extra each month can help with a rainy day fund. One of the most important things we preach to our clients is to have an emergency fund stashed away. We recommend to have six months of income in a liquid format, easily accessible but only touched when absolutely necessary. If we go back to our average tax refund, having a surplus of roughly $230 per month can be a nice way to start building that up or ensuring it is maintained.
Utilizing the IRS withholding calculator (found here: https://www.irs.gov/individuals/irs-withholding-calculator) is a good place to start to find out exactly how much should be coming out of each check. Sadly, we have seen time and time again people missing out on a portion of their check and not fully realizing the potential. Sure, even $50 a check can seem minimal, but an extra $600 invested and compounded over time could make a huge difference.