It took me a while to get on board but it's fairly simple. When the government holds your money all those months you are making zero and realistically I just don't want them holding my money for me. I understand some view their tax return almost like it's some kind of savings account but you would do far better in the long run by dividing that refund by 26 and have that amount going into some form of investment account/s every 2 weeks. You are correct that 1 year of interest on one tax refund would probably not be that substantial however it wouldn't take too many years of simple investing at even moderate returns to see your money grow considerably. I am not good at investing by any means and am ignorant to a lot of it so I generally pick the least risky options through my works TSP plan and still managed 16% last year but many folks I work with earned between 20 & 30%. Now January of this year and February haven't been too kind though...
It's a really simple concept.... Let's use an example. You going to get back 6k in taxes... Instead of over paying 6 k though the year, lower your withholding by 500 a month. Then have that 500 a month auto deducted and placed in your IRA ect ....you will even be lowering your taxable income in the process... The Compounded interest your losing is staggering.
I understand this. But couldn't those same people just put the money they receive from their refund into those accounts in 1 lump sum? I get it, trust me, it's just every time this topic or conversation comes up, there are always those people who act like you losing $1000s of dollars in interest by letting "the government have an interest free loan".
I already agreed with that earlier: "You are correct that 1 year of interest on one tax refund would probably not be that substantial". In this thread and in real life it seems like many people just like getting a tax return every year and many are then spending it(not investing it in 1 lump sum). I get that and I used to do that. I wish I could get that $ back now because as far as the topic of tax returns you simply will do better financially by never getting a tax return and putting that money that you would be getting to work for you on a regular basis.
Only those who are not good with money look forward to a huge tax return EVERY year..... Period.... There is no argument
If you amortize this out over an average working persons career that makes let's say an average household income of 80-100k per year, you are talking about pissing away tens if not hundreds of thousands of dollars by retirement age. If you only look at one year then it's not a ton of money but one little habit change can drastically impact how and when you retire.
The thing you guys are overlooking is that people who like big tax returns as a little bonus spending money may be keeping themselves out of trouble this way... If they paid in the minimum all year it's a safe assumption they would blow the money throughout the year just as they have been the refund... This would leave them up a creek without a paddle when spring rolls around and they actually owe money. I understand in principle what you all are saying, but agree with Hooker in that the difference is not that staggering if you invest the lump sum at the end of each year vs the same amount throughout the year. You lose one year of interest on a few thousand dollars, and then the compounded interest on that interest. Again it CAN make a difference but not near as big as some here are making it. Unless you are raking in the money in the first place, in which case you likely depending on a refund for spending cash anyway. I guess my point is that it's a huge leap of faith to assume a guy who blows his refund on toys and trips would actually invest it if he instead kept the small chunks from pay check to pay check....
For simple math if you invested $5000 at the beginning of year one (not accurate as it would be throughout year so this number is higher than reality actually) at a 10% return over 10 years you end with $12968.71. If you waited til the end of that year to invest (thus only getting 9 years on that same money at same return rate) you end with $11789.74... The difference ten years down the road is $1200. Not a huge chunk of change but nothing to scoff at either. If you are going to invest then its smarter to take it early (as long as you are disciplined enough to not spend your way into not being able to pay taxes in April if you underpaid).
within a year, I bet the difference is negligible this is all I'm talking about, within a calendar year
No doubt if you make decent coin, you are WAY better off to pay low throughout the year and do something with that money... But as TEmbry points out, a lot of family's aren't... Quick google search shows results of household median incomes: AZ: 56k, FL: 54K, GA: 56K, IN: 58K, ID 54K, UT: 64K That means half the people make less than 50ishK - probably not a ton of extra money to invest for those households... My gut tells me that most that are getting money back are near the median or lower... People in the middle don't have a lot of money in the bank to pay tax balances at the end of the year... And many years, there is a lot of uncertainly... Think back a few years ago - with some of the credits not even finalized until right before tax season... For many families that meant they went from getting maybe a few hundred back to a few thousand back - but you couldn't really bank on that throughout the year... And many of the Median income range, can't come up with 3,4,5K at the end of the year if they end up on the short end of the stick... Guess what I'm saying is that paying low for a lot of families hoping they can use that money more wisely during the year is a big risk, at least in their eyes.... Of course if you can afford to put that money into a mutual fund or something, as many others have already mentioned, you are WAY better off...
Would it be better to go look for a IRA, or would it be a good idea to go through a 401k? I know I sound like an idiot... Because I SHOULD know this stuff. Thanks for the help already!
If we had a straight tax system we wouldn't have to worry about any of this...but I digress.. Bottom line? We can go "but/if" all day long with different scenarios but the best thing about numbers is that numbers are numbers. "A toll is a toll and a roll is a roll. If we don't get no tolls, then we don't eat no rolls" ~ Little John, Robin hood, Men in Tights :D I pray all of you reading this will one day know the difference in working for your money and having your money work for you. Jan and I started doing just that a few years ago and we now tell our money where to go...we used to live for the tax return and bonuses...now they just chunk down car payment and then mortgages .....it is the most financially free life you could think of... FTR, I already know some of you know what I am talking about.....you live there ...some because of the bank they make and some by the sacrifices they have made to get debt free There are some that make 6 figures and then some ...but they do not have a pot to piss in because of debt.....my advice....just for good practices, would be to fine tune your return to get $500-$1,000 back and take the rest in your paycheck. Pay off all of your debt ...Credit cards first...term loans...car loans .. home equities...college...mortgages.... One of these days I will not have one piece of debt ... if I live the next 5 years and don't run into a financial death trap (which are what insurances are for) I am hoping to feel that ...
You do NOT sound like an idiot ...almost no one taught this stuff and the ones that did, many were shady insurance salesmen (not that all insurance sales people are shady, they are not) How old are you?
Depends. A ROTH IRA is usually a very good idea. You may need some in a non-qualified account so you can get your hands on it. If you have an employer that provides some match into a 401k, that is hard to pass up also. Get with a financial pro and have a conversation. It will be free to talk. You are going to do well, because you are going to get educated in finance and have an open mind. Good move.
Like Dave said, if you get an employer math, a 401k is the best way for your LONG term investment....at 25, you will not need life insurance once you are 50...you will be a rich man if you play your cards straight
This is great advice. Except I'll go a step further and say don't fall into the trap of categorizing your debt when it comes to paying it off. Debt is debt. Pay off the highest interest rate first, then go down the line paying the minimum on your lower rate loans. It doesn't matter if the lowest loan is for a credit card and highest is the house (not realistic), pay that house off first in that scenario. In real life though, the stupider a debt was to acquire, the higher the interest rates they charge (see credit cards at 20+% for example). The only time the type of debt matters is whether or not you choose to assume that debt. NEVER go into CC debt in the first place. A locked in low rate mortgage is smart debt for most people to assume. Everything in between just depends.
