If you’re getting a really big tax refund this year, we’re not trying to crush your joy. But here’s why it ISN’T always a good thing . . .
When you get a big refund, it’s usually because you had too much money withheld from your paychecks. Maybe because you filled something out wrong on your W-4. And it IS nice to get that big chunk of money.
But a lot of people end up using their refund to pay down credit cards, which rack up interest all year. And if you had a little more money in your pocket, maybe you wouldn’t have NEEDED to use your credit card.
Or if you REALLY want to be an adult about it, that extra money could have automatically been deposited into a retirement account. Here’s why it makes sense . . .
Let’s say you get paid twice a month, and got a really nice refund this year of $1,200. That means you overpaid by $50 per paycheck.
If you invested all that money and kept doing it for 30 years, you’d put away $36,000. But because of compound interest, you’d actually end up with a lot more than that.
If your 401K or IRA made 6% a year, you’d actually end up with about a HUNDRED-THOUSAND dollars after 30 years. About 60 grand of it would come from the compound interest alone.