Tax returns are not a savings account
I know you might enjoy getting back a $3,000 tax return around February every year, but is it really the best financial move? The easy answer is NO! Many people think it’s a great way to save money and it’s a wonderful unexpected chunk of money to get back just after then new year. In reality it’s the worst savings plan you can imagine.
By getting back $3,000 from your taxes means that you basically took a $57 per week bring home pay cut every week of the past year. There are a few different ways you could have made better decisions for this money. My first example is to assume that you have a revolving balance on a store credit for some furniture you purchased. It just so happens that the balance is for the amount of $3,000. The interest rate on the loan is 10%. The store set you up on a payment plan to pay back the loan in 5 years. Your monthly payment is $63.74 to repay the loan in 5 years. What a great deal you can have a new bedroom suite and it will only cost you $63.74! That means your $3,000 bedroom suite will cost you $3,824.47 when you get it paid for and it will then be 5 years old!
Now let’s rework this example above but this time we are going to add the $57 per week to the payment each month ($228 extra each month plus the minimum payment of $63.74 for a total of $291.74). This means you will pay off your furniture at the end of the 11th month. You will have only paid $3149.64 for your furniture and it will be less than a year old! Also don’t forget the final 4 extra $57 paychecks you will get in the final month.
Â The above example does not mean that you need to go out and finance furniture because you can pay it off in less than a year. The best advice is to save the money first then buy the furniture for cash. You might even get a better deal than $3,000 if you have the cash on hand to pay the furniture store. This was only an example of how you can pay off debt and save money.
My second example is for those of you who just want to get back that $3,000 in February. Let’s do the same example above but instead of paying the $57 per week to a bill put that in a savings account. If you save $57 per week in a savings account with an interest rate of 4.5% and the interest is compounded monthly you will have $3,033 at the end of 1 year. Sure it doesn’t sound like much but it’s the same $3,000 the government would have given you back with an additional $33 interest. Why give away your hard earned money to the government? If you have trouble saving money you can set up an automatic savings plan, just check the “Savings” category for more advice!