Well, it’s that time of year again. In just under a few weeks, your taxes will need to be filed (if you haven’t done so, already.) And, as we all know, the filing of taxes often means receiving tax returns (though definitely not always.)
As people get tax returns back, they use them in any number of different ways. Some folks have plans for their tax returns and some don’t. Of course, I think it’s as important to have the same type of awareness, thought, and planning in regards to your taxes and tax returns as for everything else in your financial life. If you’re not giving any deeper thought to your tax returns, you might be missing out on an opportunity to use your taxes to make a significant, positive impact on your overall financial life.
The first big question is this: How do your taxes fit into your budget?
Do you struggle to balance your monthly budget only to get a huge tax return back to then help you catch back up? (Hint: don’t do that.) If that’s the case, it could mean you are putting too much money toward your taxes throughout the year. If you change your withholding, you could have more money in your cash flow each month which you could then use to address your financial values.
On the flip side, if you are paying in to taxes every year (which obviously nobody likes doing), it likely means that you aren’t putting enough towards taxes from each check. If your cash flow is healthy, then it might be worth looking into making a change to avoid the crunch at the end of the tax season when it’s time to scrounge up the necessary payment to Uncle Sam.
I counseled a client some time ago that was telling me about his tax returns. He routinely would get back about ten grand at tax time. When I asked him why he did it that way, he said that he felt it was like an imposed savings because that money was out of sight, out of mind. I suppose that’s true, to a point. But here’s the kicker: while he was leaving all that money on the table at the time he was getting his paychecks, he was consistently finding himself short on cash each month– and would then manage that shortness by creating and then carrying credit card debt. He was essentially digging a hole with the sole purpose of then using the dirt to try and refill the hole he just dug.
Not only that, but he wasn’t gaining any interest on that money, either. He was technically “saving” it, as he wasn’t spending it; but he was saving it at 0% interest while his credit card debt was cooking away at about 25% interest, which means he was “saving” his money at a substantial net loss. If he were actually saving it, he’d be earning at least modest interest. And if he was investing it, he’d be doing significantly better, yet. So he was shorting himself left and right, all while he was growing more and more comfortable working within a system that wasn’t actually functioning for him, just because it was the way he had always done it. I think that’s a powerful example of how a poor plan can be just as troublesome as no plan.
The second question is: What is your plan?
Do you have something planned for your tax returns that will benefit your financial life? There are some folks out there who use their tax returns like they’re lottery winnings, using them to go on a shopping spree or a vacation. I try not to judge that too much. That might actually be an ok way to use them, dependent on the rest of the variables in your financial picture.
The bigger question is how (or if) using your tax returns for those purposes fits into the bigger plan of your financial life. Ask yourself the following:
- Is your month to month cash flow solid?
- Are you contributing to savings throughout the year to build up protection against financial curveballs?
- Is your savings a “comfortable” level?
- Do you have an emergency savings?
- Could you retire faster and younger if you had more money each month to contribute there instead of taxes?
- Could you get out of debt faster the same way?
I think you should be addressing your values. I think you should be taking a more active, awareness-centered approach to your finances and use your taxes to better your financial life or situation. Using your tax return to fund a vacation might be an ok way to use it—but is it the best way?
Start by allowing this tax season and this year’s returns to inform the choices you’ll make about next year’s. Set some financial goals for yourself and then make choices to work toward them. Happy Tax Season– and happy planning! Want to learn more? Give us a call at 888.577.2227 or visit our website at www.ConquerYourDebt.org.
Author Dan Szymczak is a Certified Financial and Housing Counselor at LSS Financial Counseling.