Sunday, June 22, 2008

Does a Yearly Tax Refund Make You Financially Irresponsible?

I never thought a person could enable himself or herself. It is possible though. I did it for many years. Even though I carried around a credit card with a balance of a few thousand dollars every year, I never saw myself as being in debt. (In case you didn't read yesterday's post, this is a direct example of being in denial)

The reason I didn't consider it debt was because each year in January I would do my taxes, get my refund, and pay off all of that debt. In my mind, it was not debt because it would be paid off before February 1st each year.

Then came the year when there was something more pressing than paying off my debt. I don't remember what it was. It may have been the bills from my toddler's birth. I hadn't saved for that like I did for this baby and they caught us off guard. (Doesn't insurance pay for all of that, ha ha.) Suddenly my refund did not go toward my debt. Do you think I changed my ways? Nope. It was a habit now. I had to use those cards every month because we needed groceries etc. In all honesty we could have done without a lot of the "groceries". When you shop at Wal-mart for everything a video game is considered "groceries".

It took a long time for me to realize that the tax refund had actually been enabling me. As well as costing me a lot of extra money. Think about this. I was paying around 10% interest each month on the card, so the government was collecting interest on my money all year long while they "held" it for me. On top of that, I was paying back the credit card companies for the items I had purchased, but I was also paying for being allowed to "hold" their money for a year.

How stupid! What I should have been doing was changing my W4, and holding my own money and making my own interest. Hindsight is 20/20 I guess.

Even after realizing all of this it has taken until recently for me to actually change my W4. This is going to do a lot for me and for my debt repayment efforts. I will be able to pay off my debt sooner, and I will not be paying as much in interest while "waiting" all year to get my own money back.

It is astounding how many people use this for savings. It truly is the worst savings account in the world. But, if you need to be enabled it is just perfect. Things will have to change though because in the past we have also used it to pay our house taxes at the beginning of each year. We must now create a savings plan just for that, which I will talk more about tomorrow.

So what do you think? A lot of people realize they are getting no interest and giving the government in essence an interest free loan, but they like it this way. What do you do?

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