I know a couple of people that use their tax refund like a forced savings plan. Each year, when they are given their tax papers to sign and complete, they check the little box that allows the government to take a few extra dollars out each paycheck. The point of this feature is in case you know you will be making more money than just the paycheque, say, you have a side business that deals only in cash. This way you won’t be hit with a huge payment at the end of the year. Some people, however, check this box not so that they can avoid making a payment, but so that they can get a bigger tax refund. Is this a good idea? Let’s take a quick peek at some of the pros and cons.
Tax Refund Pros
It’s a savings plan that you already have. You don’t have to go to a new bank, or set up a new account online. It’s not something that you have to spend a lot of time thinking about or planning for. It’s just a box that you check on a single piece of paper, and you’re set. Once you tax returns comes in, bingo! It’s like a lottery that you know is coming once a year and you’re guaranteed to win.
It’s a decision you only have to make once a year. I remember as a kid getting my weekly allowance and having to struggle in agony as I had to take that already small amount of money and divide it further so that I could save some. It was a hard decision to make, and every time that I made it I felt physically and emotionally drained. With using your tax refund as a forced savings plan, you only have to make that decision once.
Tax Refund Cons
There’s no interest on your savings. Instead, the government is most likely reaping the benefit of your income tax refund sitting in a bank somewhere, earning interest. Your money could be doing that instead. While most bank account interest rates are fairly low, and while the amount of money that you could be earning throughout the year really won’t add up to a ton, it’s still your money that you’re leaving on the table.
There’s no access to your money. If you suddenly need it in case of emergency, it’s not like you can call up the Canadian government and ask for your tax refund to be processed in November this year. You’ll have to wait until March/April like everyone else before you can access your money.
All in all, it’s pretty hard to make a good argument as to why this particular savings plan is better than an automated bank account withdrawal. It does the same thing, except earns you money and makes your money accessible. The only reason I would suggested setting up a forced savings plan like this is if you lack the ability to sit on your cash as it grows. If accessibility means that you’ll end up spending that money, then by all means, let the tax man take your cash and hold onto it for you if you can’t hold onto it yourself. Just make sure you have a good plan for that money when you do get your tax refund, else your savings and patience will be wasted. Pay down debt, set up an emergency fund, buy a new car, or whatever you need to do, just don’t let that money disappear into your regular checking account.
Do you use your tax refund as a force savings plan? Why or why not?