Every accountant’s favorite day – Tax Day – is coming up. Are you getting a big refund? One thing that you may not realize is that the money you’re receiving is actually…your own money. No, the government did not steal that money; you actually gave it to them by overpaying on your taxes. So congratulations on your lucky day – you have received a huge check that is actually just your own money.
Confused? Allow me to use a delicious analogy. You go to the grocery store to buy your favorite kind of ice cream (double Oreo chunk! I bet you are getting hungry already.) You reach into your wallet for a five dollar bill, but are so excited that you actually hand the cashier $10 instead. This is more than your fancy ice cream actually costs, so you’re pleasantly surprised when the cashier hands you back $5 in change. Now when you get this $5, are you going to race out and find the nearest Starbucks to buy a caramel latte? Probably not. Why? Because it was your money in the first place! You handed the cashier $10 for your ice cream that only costs $5. You gave her too much money, and she gave back the extra.
This is what happens when you get your tax refund (minus the ice cream). After you receive your change, did you race out to spend that $5 at the nearest Starbucks just because your ice cream didn’t cost $10? Let’s talk about what we can do with the money we got back, and how we can save it in the future. More specifically, let’s talk about a guy named Sam
Sam is an average guy with an average house and an average income of $100,000. He lives in an average house and treats himself by going out to dinner with his girlfriend once in a while. On tax day, he gets a refund of $2,000. This is 2 percent of his yearly income. Now, while Sam could go out and spend that $2,000 on something extravagant (can you imagine how much Oreo double chunk we could buy with that?), he knows that this money is not a gift and is in fact just his own money back. So Sam decides to do something a little different with this $2K; He will save it and then for next year he will increase his contribution to his 401K by 2%.
If you have not yet reached the cap for your company match, you will get free money from them! All right, so free money seems impossible, how can you get something from nothing? Many companies as a benefit are happy that you are saving on in your 401k, so they will match your savings. If you’ve already taken advantage of this amazing opportunity, then consider opening an IRA or bank account to save that amount.
So what will you do with your refund check? Blow it on something you won’t even remember or use it to start building wealth for your family? Share your story of what you choose to do. If you are struggling with how to do this, please email me, I am here to help.