Are your personal finances a highly-organized, well-oiled machine? Or is there room for improvement — a lot of improvement?
The answer to that question is more important than you might think, especially during tax time. Most people anxiously await a big check from Uncle Sam in April, but it turns out a giant tax refund might not be so great after all. In fact, according to some experts, giving up that refund in lieu of more money in your paychecks gives you the control needed to maximize your income.
On the other hand, others believe that’s an unrealistic approach to saving and investing. Some of us simply can’t be trusted to put the extra money in an investment or savings account rather than spend it.
Below, we ask the experts which is better: A bigger refund or a bigger paycheck. See what they had to say.
The Merits of More Money All Year
Author of dozens of personal finance books, including No. 1 selling Rich Dad, Poor Dad, Robert Kiyosaki says there’s no doubt about it: Taypayers should take more money in their paychecks over a bigger tax refund.
Kiyosaki explained that with every dollar we receive, we have the choice to spend it or invest it.
“And your mindset (whether you think like a rich person, a poor person, or a middle class person) will affect the choices and decisions you make. Will you buy a few silver coins and invest money from every paycheck or decide to start a small or home-based business? Or will you buy a new HDTV?
I’m not one to advocate living below your means, but suggest, instead, that we ask ourselves ‘How can I expand my means?’ One way to do that is to focus on investing. And even small amounts, on a regular basis, will put you on the road to having your money work for you. (Instead of you, working for paychecks, all your life.)”
Linda Descano, a CFA and the Managing Director and Head of Content and Social at Citi, told GOBankingRates, “Oftentimes, people will overpay taxes and see a reduction in their paycheck because they actually prefer to get big tax returns — simply because they pay emotional dividends and they make us feel as if we earned something or received a special gift (when in fact the money was ours to begin with).
However, she said that in many cases, it’s preferable to get more money in your paychecks throughout the year than receive a big tax refund. “Receiving more money in paychecks earlier in the year allows you to build an emergency fund if you don’t have one, so you have cash on hand to cover those costs rather than adding to your credit card debt.”
Finally, Tiffany Aliche (better known as the Budgetnista) agreed, “It’s better to get more money throughout the year versus getting a big refund check.”
She explained, “Receiving a refund check means that you overpaid taxes to the government, essentially giving them an interest-free loan for a year. That money could be better used by you each month. The government would never lend you money for free, why should you?”
Benefits of a Bigger Refund
Not all experts agree with the idea of putting your money to work yearround, however. Personal finance blogger, J. Money of Rockstar Finance, for instance, says in reality the refund is the better option.
“Personally, I prefer to get the big chunk in the end. In a perfect world, you’d receive the money throughout the year — and then bank it — but nine times out of 10 all you’ll end up doing is spending it,” he stated.
J. Money explained further that receiving “a nice big pile” of money all at once prompts taxpayers to take action right away, “which hopefully means saving/investing/paying off more debt than you would have across the year.”
The “Ultimate Cheapskate” Jeff Yeager also made clear that for those with their finances in order, there’s no good reason to give the government that interest fee loan by allowing them to keep more of income than necessary through out the year.
“Having said that,” Yeager clarified, “if you lack financial discipline, having more taxes withheld than is necessary can condition you to live on a smaller paycheck and gives you a once a year windfall that you can then theoretically put into savings. Of course, if you lack financial discipline in the first place, why am I guessing that that tax refund will be spent on a new big screen TV rather than invested in savings?”
In the End It’s up to You
Like most matters related to personal finance, there’s no one clear-cut answer. Luke Landes of the blog Consumerism Commentary recognizes there are benefits to both.
“Personally, I’d rather manage my withholding throughout the year so whether I receive a refund or owe more money on a tax bill, it’s a small amount,” he told GOBankingRates.
However, he noted either option can work. “Getting a big refund when you file is not so bad if (a) you recognize you’re giving your government an interest-fee loan and (b) you’re responsible and make good decisions with the use of that ‘windfall.’ Owing a big tax bill is not so bad if you’ve been planning for it and don’t have to scramble to come up with the money, and you’ve been earning interest throughout the year.”
Tax attorney and principal tax research analyst for The Tax Institute at H&R Block, Lindsey Buchholz, also found benefits to each option, explaining it simply comes down to personal preference.
“Some argue that a refund is your money so getting it throughout the year gives you the opportunity to make it work for you and that waiting for your refund until April 15th essentially gives the government and interest-free loan of your money. However, those who like the idea of getting a big refund say that this type of planning serves as forced savings for those that need the extra push to save.”
John Waggoner of USA Today also noted that most people use their tax refund as a kind of forced savings account. They might be receiving very little interest, but they enjoy getting a substantial check in April.
“Back when you could earn 5% or more in a bank account, financial planners said that it made more sense to get more money in your paycheck each month, bank it, and collect interest. Why give Uncle Sam an interest-free loan? Today, they say the same thing, but fail to mention that you’ll get zip in most interest-bearing bank accounts,” Waggoner explained.
He said the real answer is this: “If you’re starving three days before payday, give yourself a raise and take a bit more money each week. If tax refund day is like your birthday to you, take the check and have fun.”
So the moral of the story is this: in theory, giving up that big tax refund and taking control of your money is the most logical thing to do. But Americans don’t always behave logically. When you examine the few options depositors have today for maximizing their savings, combined with the fact that most Americans are not, in fact, saving much at all, it’s clear that a big check from the IRS might be the only chance average taxpayers have at building a nest egg.
No, the government isn’t going to pay you interest on your “loan,” but they sure aren’t paying any on your savings either. Until that changes, don’t feel guilty about enjoying that big tax refund this year — just be sure to save some of it.