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Clueless “experts” love talking about tax refunds

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Ahhh…tax refunds.

Everyone (especially virtually every personal-finance “expert”) has an opinion about them. And most of them are wrong.

I explained why this is nonsense in a blog post last year:

The average tax refund is about $3,000.

How much interest are you losing if you get a tax refund? $2.50 per month. Yes, you read that right. Two dollars and fifty cents a month. I have that much money in my shoe right now.

What’s more, if you’d had that money, you almost certainly would have spent it.

On the other hand, if you get a tax refund, Americans are more likely to pay off debt and save it.

This is a perfect example of “experts” missing the forest for the trees.

This is why I say that personal finance is more about psychology than minutiae or percentage points.

Read the full blog post here.

Long-time IWT readers will notice the difference between people who argue what we “should” do…versus what we actually do.

Question for you:

  • How big will your tax refund be?
  • What will you do with it? (Be specific.)

Leave your answers in the comments.

P.S. I’m giving away $1,001 as an experiment, which might change the way you spend your tax refund. Click here to enter to get $1,001 free.

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  1. Our state refund was $195 and was automatically direct deposited into our checking account. I didn’t specifically add it to our budget (yes, we use a budget), so it’ll just get spent in the normal course of things, and that will be $195 that doesn’t get moved out of savings.

    Our federal refund was $66 and will get deposited next week in our savings, where it will stay. All of our savings (on top of our emergency fund) is going toward three large goals–adopt kids, buy land, build a house–so I guess it will eventually be going toward one of those.

  2. My tax refund was $1100 (from federal and state). I put it in my emergency savings account; I’m moving in June and although I’m getting reimbursed, I want that cushion just in case.

    After the move, that money goes straight to my student loans.

  3. $1200 and we invested it in Vangaurd mutual funds. We also have had our’s for months since we e-filed and did a direct deposit!

  4. We OWE about $3,000, thanks to my husband getting a lot of freelance work that I failed to account for. Luckily, I had a lot of advance notice since I did our taxes in January, so it’s all budgeted for and it won’t be a hit. It did mean I had to really stretch to finish fully funding our 2011 Roth IRAs, which I just finished yesterday.

    Withholdings have already been adjusted upward at our W-2 jobs to ensure that this won’t happen again.

  5. My wife and I had no refund; two years ago I reduced our withholding to account for the tax credit for installing geothermal, and last year I forgot to increase it. Thus, we’re paying this year (although no penalty; we’re within safe harbor since we payed more than last year).

    I’ve already submitted updated W-4s to increase our withholding. Next year we’ll probably end up paying a couple hundred, all told.

    If I had gotten an extra refund, chances are it would have gone mostly to an extra payment on the house, plus maybe some portion of fun money.

  6. We’re getting around $3,000 back and will invest it in boring dividend stocks.

  7. Absolutely agreed that there’s a tremendous psychological benefit to a sudden unexpected windfall from a tax refund. Yeah, I missed on a little bit of interest…but as you point it would be on the order of a few dollars at most.

    I don’t have the exact numbers in front of me, but combined federal and state refund is approximately $900. I have no debt to pay off, so that money is being divided between a travel fund I have established with some going towards a SCUBA diving class I’ve been saving for (probably about an 80/20 split).

    The small amount of lost interest just can’t compare to the emotional rush of a sudden $700 deposit into the travel fund. Trying to keep me eye on the forest…

    • My “refund” is always big ($3-5k) and usually used to bulk back up the savings account. It’s mostly earned income credit and child credit since I haven’t been able to find a full-time job and my child support isn’t taxable. I feel a little bad getting money back that I didn’t put into the system, but if it’s legal and the IRS is willing to give it, I’m gonna take it. It really helps me out a lot.

  8. We already filed our taxes last month, and got a $7500 refund, which is going into our 401(k)s (We’re both self-employed, and I was already putting $5000 in, so this is as close as I get to employer contribution matching.)

  9. We got a couple grand back and finished paying off our car and credit cards. Felt awesome. Now that money we used to pay out each month is being automatically sucked into our savings weekly to build up our emergency stash. Then onto bigger and better things! I’m really excited about it all if you can’t tell : )

  10. I just had my taxes done yesterday, and I’m getting about $500 back from state and federal. I’m launching my very first online training course next month, so I’ll use the $500 to pay for any last-minute unexpected expenses.