I got a question from a very concerned follower a few days ago. She was asking about a friend who got a huge tax refund. She was concerned that the friend had listed too high of a withholding on their W-4 resulting in too much in taxes being withheld throughout the year.

For the record, my follower was right. Overwithholding taxes resulting in a big refund is not optimal. It’s giving the government an interest free loan. Your hard earned money is sitting in federal reserve banks, not earning interest, and losing value to inflation for up to a year or more. Finally getting those dollars back by the following tax day is little consolation for all that lost value, right? Well, not so fast.

First of all, the numbers just aren’t big enough to move the needle in your financial life. Let’s say you get a $2,000 refund. On average, the government held that for six months of the previous year. Let’s further imagine you could have been earning a 2% return in a mythically generous high yield savings account. What did that cost you? About 20 bucks. I don’t suggest you throw away 20 bucks, but let’s also not kid ourselves into thinking this is an issue that will change your financial outlook.

More importantly, this is an example of how the math on the spreadsheet isn’t always what’s right for an individual. While it’s true it’s not optimal, the bigger factors at play aren’t the math. They’re things like habits, mentality, mindset, motivation, and focus. If that $2,000 refund was added to monthly paychecks along the way, would it have actually been saved or invested, or would it have been spent and lost in the shuffle? Getting the lump sum at the end of the year acts like a forced saving account. Is that lump sum money put to better use by paying off debt or investing in a way the monthly paychecks wouldn’t be? The answer isn’t the same for everyone. But if you like the big refund, and you put that money to good work, don’t beat yourself up for doing it wrong. It may be better for you!

As always, reminding you to build wealth by following the two PFC rules: 1.) Don’t invade sovereign democratic nations and 2.) Don’t succumb to hateful propaganda.

-Jeremy

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