by Wayne Ramsey

Created on: March 23, 2007   Last Updated: October 19, 2010

Tax refunds are essentially the governments way of telling taxpayers that they just got a free loan.  Anyone that receives money back on their taxes is simply giving the government more money than they are required to pay.  Since this money has absolutely no interest attached to it the government is able to get a loan without having to pay any interest for the favor.  This is realistically a deal that is considerably better than even what a bank gets on their low interest rate products. 

Why is a Refund bad?

Many people feel that their tax refund is the perfect time of year to go out and buy big ticket items.  With many people expecting $5-$10k in tax refunds on an annual basis it is no wonder big screen televisions and other major items fly off the shelves at this time of year.  People feel like they are getting free money from the government and instead of spending that money wisely they would rather use it as a means of reward for yet another good year.  There is nothing wrong with this way of thinking except that the idea is actually costing Americans a lot of money in the process.

Those that get large refunds really need to look at the much bigger picture.  The refund itself is great to have and it may be massive and fun to spend, but how did it get that big in the first place?  The reason there is a big refund is because the tax payers were overpaying to the government the entire year.  This money of course adds up until it is time to do taxes.  The problem is that this money could be used for other things throughout the year.  Take a $5,000 return for example.  Imagine if that was instead an additonal $400 a month.  That would feel like a major pay raise.  People would be able to have a little more financial freedom with that sort of additional money each month.

Now look at the picture a little differently.  Look at all of your bills.  If that $400 a month was to be paid towards bills throughout the year instead of going directly to the government, think about the money that could be saved on interest.  If you take the common credit card interest rate of 25% then that would equate to around $1,000 in a year.  That means by letting the government have your money instead of paying it into credit cards you are taking a $1,000 loss on your money. 

Try to look at the picture from an even better angle.  Imagine if this money was used to pay off one credit

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