Tax Refunds and Other Lump Sums
I actually look forward to filing taxes each year, and I do it as soon as I possibly can. I just need my W2 (this year available online) and my mortgage statements; everything else like charitable donations and interest earned, my Quicken program tells me.
I know, I shouldn’t allow a big refund. I know, I should adjust my withholding. I know, it’s my money and I loaned it to the government all last year, interest free. Silly me! But I just love my tax refund.
Why? Because it allows me to do things I otherwise might not. My refund comes in a lump sum, and like other lump sums (bonus, extra paychecks, etc.) it’s out of the ordinary. It’s an occasion to be more thoughtful than if that same money came as a tiny trickle each pay period.
Irresponsible? Undisciplined? Maybe. But this is one case where I find a mind game with myself works better than careful, frugal, prudent planning each week. I am secretly saving all year, never missing the money, and then boom! Mid-February (at the latest) a nice lump sum lands in my checking account.
Of course, it’s what I do with that lump sum that makes all the difference. This year, between my federal and state refunds, I will be able to pay off my Toyota Prius a full two years early. That’s a monthly $464.14 car payment wiped out, freeing up that cash for other purposes. What particularly tickles me is the $47.47 per month in interest over 24 months that I won’t be paying. That’s saving a whopping $1,139.28.
Now coming up, first paycheck in March, my company hands out the annual bonuses for the previous year. Again, because it’s a lump sum, it allows me to be more dramatic and make a noticeable difference in one fell swoop.
Rob and I decided that the smartest thing for the bonus this year is to pay off his last credit card balance, in full. Last year Rob wisely transferred the balance to a card with a promotional 0% interest rate, so for many months we’ve been making quick progress dumping that debt. But the 0% rate expires in a few months, jumping up to 12 or 14%. At that point most of the monthly payment will go to interest, not principal. What a waste!
In a recent post Paula pointed out what a great feeling it is to pay off those darn credit card debts that hold us back. I can’t wait! No car payments, no credit card debt. Hurray for lump sums, and hurray for financial freedom!
Ack! Going through the same credit card hell right now. It’s funny how some of the small balances seem to never disappear.
I actually love filing my taxes early, too. Not because I get a refund (I don’t), but because when March/April rolls around and NPR won’t shut up about taxes, and everyone I know is freaking out and filing for extensions, I can smugly sit back and buy myself a beer.
Good call on the Prius! I hear that incentive is going away.