Disclaimer: Jill Schlesinger is an ambassador for Marcus by Goldman Sachs and has received financial compensation. However, all thoughts and opinions are hers.
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A single, mid-20s professional who has $1,000 in credit card debt and is interested in starting a retirement plan just received a tax refund of $4,000.
What should this person do with the $4,000 refund?
I know lots of people like this – people who relish the thought of a tax refund, but let’s boil this down to the bottom line: you just gave Uncle Sam an interest-free loan for a year. You may be patriotic, but on behalf of all taxpayers, let me thank you because really, this is just too, too kind!
I hate tax refunds. Many say that they will use their refunds for lofty purposes, but just as often, they blow their money on stuff they don’t need. Don’t get me wrong, I like stuff too (see my spending line item on my adorable Norwich terriers), but your friends are squandering a great opportunity.
Remember, a refund occurs because you withheld too much money from pay, not because you got a tax cut or because your tax preparer is some sort of genius. Simply put, a refund is just the difference between the amount you withheld and the amount you actually owe.
So the first thing a person in this situation should do is to adjust their withholding to create more cash flow throughout the year. To help out, the IRS has a nifty withholding calculator. Remember, the goal is to not owe – or be entitled to – a penny…flat, at least for tax purposes, is the ideal.