Tax returns. What are you spending it on? (2 Viewers)

[Bryan X]

Yes, you would save some money over the 15 year period, but nowhere near the amount you are claiming (unless you are stuffing the tax refund in your mattress).

To compare apples to apples, you would also be investing your refund when you received it. So over the years you'd only be losing the difference in the amount of interest due to either:

Example 1: Reducing your withholding and investing the $5,000 incrementally over the year.

Example 2: Letting the government keep your money and investing it when you received the refund.

If you start with 0$ and invest $417 dollars a month ($5,000 / 12) and it is compounded monthly at an annual rate of 7%, after 15 years you'd have roughly $130,000.

If you start with 0$ and invest $5,000 dollars after the end of each year when you receive your tax refund, compounded monthly at an annual rate of 7% you'd have roughly $128,000 after 15 years.

So, the real cost of not reducing your withholding in your example is only about $2,000 over 15 years, not $67,000.

I think everyone knows that theoretically it's better to have your money up front rather than let someone else keep it during the year. But in the real world, many people wouldn't invest the extra money they would receive through reducing their withholding. A lot of people would either spend it or stick it in a savings account earning less than 1%. So for many people, giving it to the government during the year is looked at as a 'forced savings' plan-- a fairly painless way to save some money.

 

[James L White]

I'll be getting ~$3000 of which 2000 will go into the mortage, that should help slightly as far as reducing the interest I'm paying.


the rest into savings and a new couch. which I need badly

 

[James L White]

also I'm gonna adjust my withholdings too, that way the money I'd pay to the govt I can spend(save) each week instead of waiting until my refund comes.