Do you struggle to save enough to reach your goals, like retirement, and would like to find extra money to do it? Well, I might have the answer, your tax refund!
We’re right in the middle of tax filing season and many of us will be getting refunds, some of them quite large. According to the U.S. Department Of The Treasury, as of February 28, 2019 the average tax refund for 2019 (based on 2018 taxes) is now $3,143. That’s a fairly big chunk of change and it might be just enough to help you reach your goals. Let’s see how.
If you ask most people if a tax refund is a good thing, they will say “Yes”, thinking that a refund is extra money they are getting from the government. Many people see a tax refund as a windfall and spend it on vacations, clothes or other consumer items instead of putting the money to work for them.
The reality is that when you get a tax refund it means that you have given Uncle Sam an interest free loan. A refund is nothing more than the return of your money, not the government’s. The tax refund is just an over-payment of taxes and anytime that happens it means that you are not in control of your own money.
Instead of getting a one-time refund when you file your taxes, wouldn’t it better to actually have the use of your money throughout the year? While it can be tough get your refund (or tax owed) to exactly $0 you can get a decent estimate of your tax liability by using the IRS Withholding Calculator. The calculator walks you through the steps needed to estimate your tax liability and makes suggestions on how to adjust your W-4 so that you don’t get a HUGE refund.
Once you get your tax withholding adjusted (thereby reducing your refund) you will find that your paycheck will have “magically” grown, sometimes by hundreds of dollars! Congratulations, you’ve just taken control of your money. Now the trick is to not spend that extra money on “stuff” but rather use it to reach your goals and build wealth.
If you take the average tax refund of $3,143 that is referenced above and divide that by 12 months it comes out to “only” $261/month. While $261 isn’t an insignificant amount of money, it small enough that many of us wouldn’t think twice about spending it on a nice dinner at a trendy restaurant, a new electronic gadget, or a gift.
The challenge we now have is to ignore the temptation to spend that relatively small amount on short-term wants and instead allocate that $261 to help us achieve a longer term goal. Our brains are wired to think short-term rather than long-term, so It can be hard to imagine how a little bit of money can turn into a significant sum of cash.
What’s a significant amount of cash? Well, everybody is different but I bet none of you would turn down $388,000, right? That’s the amount of money you would have if you invested that “measly” $261 each month for 30 years and got an average investment return of .66%/month (8%/year). Does that seem unrealistic? OK, how about $262,000? That’s the same $261/month for 30 years at a return of .5%/month (6%/year). Still too much? How does $38,000 sound? That’s what you’d get if you took your $261/month for 10 years and got a 4% return (.333%/month) on your money. I don’t know about you, but I’d take $38,000 anytime. The point is that any of these amounts is enough to have a positive impact on your life.
Now, obviously these numbers are purely for illustration and not guaranteed but they do show the power of taking a longer-term view with our money.
When you combine the extra monthly income that comes from minimizing your tax refund with a long-term view of your money, your financial future becomes just a bit more positive. Goals that were once out of reach become something that might just work. Reducing your tax refund and gaining use of your money throughout the year is just one way to find “extra money” that can be used to fund your future. Take some time and think about some other things you could do to re-prioritize some of the money in your life. You might be surprised at how many dollars you find!
Once you’ve freed up the extra $$$ the next step is to begin to define the goals and dreams that are important to you. Once you’ve done that you can assign some of those “extra” dollars to those future goals instead of spending them today.
I’ll talk more about making the most of your cash-flow and setting realistic goals in upcoming posts so stay tuned.
Setting goals and building and acting on a financial plan takes work. While many people have the time, motivation and energy to do it all on their own, many do not.
If you would like some help building your own financial plan or would like a second opinion on anything related to your financial life, I’d be honored to speak with you. You can contact me by sending an email to email@example.com or visiting our website at www.financialclaritypartners.com and clicking the link for the “Contact Us” page. Or, if you want to speak with me directly, go ahead and give me a call at 678-626-7526 and we can discuss your needs and determine if my services might be a match.
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