Your parents are delusional about tax refunds
April 14th, 2011 - 90 Comments
I love tax time because all these kooky weirdos come out of the woodwork — including personal-finance “experts” who don’t know what they’re talking about.
These are the people who will get on TV, or on their online soapbox, and lecture you about taxes. One of their favorite go-tos is this old chestnut:
“If you’re getting a tax refund, you’re giving the government free money!”
What they mean is that you should not be getting a refund, because if you are, the government has been sitting on your money and earning interest for the entire year.
Let me break this down for you.
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.
Yes, Mr/Mrs. Expert, mathematically, you should pay the government as little as possible during the year and earn interest on that money for yourself.
However, there are 3 problems with your advice:
1. Your advice is totally unrealistic as Americans spend whatever they have
2. Americans don’t understand withholding, despite your repeated exhortations to “change your withholding!” Perhaps you don’t realize that those words sound like COMPLETE GIBBERISH (why personal-finance education is overrated)
3. Most people would rather get money back than pay it — numbers be damned
So why do these “experts” continue promulgating the same, tired old advice that never changes behavior?
Because they can rap ad nauseum about what we “should” do with our money…but they fail to understand the psychology of what we ACTUALLY do.
I went on PBS’s Nightly Business Report to share this perspective. Check out the video:
Note: During filming, the cameraman was like, “Um…do you want to button one more button up?” I tried it and muttered, “This goddamn button adds 10 years” so I removed it. Then the other cameraman made a crack about how many viewer emails they were going to get about me and my shirt. However, I think their average viewer age is in their 60s, and I am not popular w/cougars.
Ok, back to tax returns. The reason for the title of this post (“Your parents are delusional about tax refunds”)?
Because in many households, there is a mom or dad who has some of the kookiest ideas about taxes, sitting there in an old, dusty recliner, spouting off uninformed nonsense about the government and tax rates. Once you’ve heard something enough times — and “getting a tax refund is BAD!” is one of the more innocent ones — you start to believe it.
So send this article to your parents and 3 friends. See what they say. Leave a comment with their responses.
This is just another example of a counter-intuitive money lesson you’ll find on I Will Teach You To Be Rich.
Remember — personal finance is AT LEAST 50% about psychology.
One of my students asked this amazing question, and I loved it so much that I want to share it ...Read More