Is Getting a Tax Refund a Good Thing?
Podcast Transcription
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Welcome to another episode of PFCU’s Money Talk Podcast. I’m your host, Maddy. On this episode, I want to talk about tax refunds. Now that Tax Day is past us and you might be seeing a refund hit your account so, I thought it would be a good time to talk about it. As of February 16th of 2024, the IRS reported that the average tax refund amount was $3,207 and refunds were about 2.1% higher than a year ago. Keeping in mind that this might have changed now that we’re in April. To many of us $3,000 is a lot of money and it might feel like free money hitting your bank account when you get that refund but there are a few things we want to keep in mind about refunds.
According to Northwestern Mutual, it’s best to not get a refund and here’s why. Tax refunds mean that you loaned the government your money and now they’re paying you back but without paying any interest. If that money were instead in your paycheck throughout the year, there are a lot of ways you could make that money work for you.
For example, increase your contribution in your retirement account. Don’t wait for the refund and miss out on a years’ worth of earnings on your retirement savings.
You could also build up your emergency fund. We all know how important having an emergency fund is. That money would be much more useful in an account set aside for emergencies throughout the year. $3,000 would be about $250 a month which could help with your car breaks down or you have to repair something in your home, especially if your putting that $250 away every month.
Or, you could pay down debt. That same $250 a month could also go towards debt, saving yourself money in interest payments every month.
They recommended adjusting your withholding if your refund is $1,000 or more. See your employer’s HR or payroll department and file a new w-4. There’s also a great tax withholding calculator at irs.gov. Check it out.
On the other side of this coin, a big tax refund might be something that you prefer, that the government hanging on to this money for the year and paying you back is a great way for you to save. But it’s important to know what your goals are and use that chunk of money to help reach those goals. Maybe put some or all towards your savings, make a large debt payment or pay an expense that you might otherwise had not saved up for.
I personally like getting at least a small refund, it kind of allows us to have been automatically saving that money throughout the year when we otherwise probably wouldn’t have and then when it hits our bank account, we put it right into our savings account. It’s totally personal preference. I wanted to kind of cover both sides of this and really knowing what works well for you.
Thanks for listening everyone!
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