Every spring, millions of people leap for joy because they’re about to get their tax refunds. It’s money we weren’t counting on! Free cash from the government! Who wouldn’t be happy?
We’ve become so accustomed to getting tax refunds that it’s now part of the norm…along with living paycheck to paycheck, not saving anything and having a $482 car payment just to impress strangers at the intersection. Normal sucks.
And the reality is, if you’re getting a large refund every year, you’re not winning at all—you’re losing.
Let’s say you have an uncle named Sam. He’s not great with money and is deeply in debt—but, boy, does he have a deal for you! He proposes you loan him money, interest free, from every paycheck, so he can do whatever he needs to do with it. He’ll repay you sometime in the spring. Hmm…
See, that tax refund isn’t free money at all. We loaned the government our cash and received diddly squat in return. Fun fact: In the spring of 2016, the IRS refunded $203 billion. The average refund last year was just under $2,900—or an average of $242 more per month those people could have held onto that year.
Want to take it one step further? If someone invested that amount each month in an index fund mirroring the S&P 500 last year, he would have had nearly $3,300 at the end of the year. (The S&P returned about 9.5 percent in 2016.)
Inflation’s remained low in recent years—but over the past decade, it’s been as high as 3.8 percent. But, really, lending money for free when inflation is anything above zero is losing.
That’s why experts agree we shouldn’t “invest” money in jars buried in our backyards or under the mattress—and we don’t want to lend the government nearly $2,900 a year for free. Even if you don’t consider the returns we could be earning in high-yield savings accounts or the stock market instead, this strategy actually costs us.
During the same year we were all overpaying our taxes by $203 billion, millions were living paycheck to paycheck. And 63 percent of Americans didn’t have enough savings to easily cover a $1,000 emergency. Think we could have used that extra $242 each month? Yep.
Remember, it’s not free money. However, since we weren’t planning for it, we call it that and tend to spend it guilt-free.
A friend who runs car dealerships once told me the auto industry’s make-or-break season is from February to April, which I thought was interesting since many people are still paying off holiday debt. But he reminded me that customers come in and spend their refunds as if they’re free windfalls—forgetting it’s their own money with a significant opportunity cost attached: 0-percent interest minus inflation.
You might be thinking: “But I’m not good at saving money, so the government does it for me!” No. The reason you’re not saving is because you’re not budgeting—or because you haven’t made it automatic. You don’t need the IRS to save for you because you’re a grownup. And budgeting doesn’t cost a dime.
It’s hard to get to break-even with the IRS, but we can get pretty close by using its withholding calculator. And looking at how much we paid last year and how much we got back, and making some adjustments.
I’ve been tracking how much I’m over or under, and adjusting accordingly since 2011, each year inching closer to that break-even amount. Last year, we owed $606—and were happy about it! We knew that 100 percent of our income was used much more efficiently by us than the government.
A version of this post originally appeared on MoneyPeach.com.