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!

February 13th, 2007 at 11:26 am
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.
February 14th, 2007 at 6:43 am
[...] All the financial experts agree that if you are getting a refund then you have given your money to the government interest-free for a year and this is just plain wrong. But I disagree and follow Rich’s reasoning on this one. [...]
February 19th, 2007 at 1:25 am
[...] Tax Refunds and Other Lump Sums by Rich @ Queercents: What would you do with your tax refund and other financial windfalls? Rich suggests using them to make payments towards your debt. [...]
February 21st, 2007 at 8:04 am
[...] In fact, I have Pottery Barn’s Christmas 2006 catalog in front of me right now. Four months ago, I stuck a Post-It note on page 77, marking the beautiful “Montego” dining table, and saved it in my desk Inbox all this time. I was determined that, if my tax refund and bonus from work weren’t entirely taken up in paying off the Prius and the last of the credit card debt, I would use whatever extra I had to splurge on this gorgeous table. [...]
March 2nd, 2007 at 1:38 pm
[...] It’s that time of year where the early-birds amongst us are doing our taxes. Coinciding with that (for many people) is the year-end performance appraisal process at the day job which often results in a lump sum bonus and/or a base pay increase. Rich gave us his take on “Tax Refunds and Other Lump Sums” and Nina chimed in with her take in Part II. Whether you choose to spend or save your newfound stash, it is worth taking a few minutes to calculate and plan for the future. [...]
April 6th, 2007 at 7:29 am
[...] However, if you are going to spend the money anyways, getting a tax refund can be a wise decision, since it forces you to save. Some folks love getting a lump sum, while others argue for finding a balance. [...]
January 4th, 2008 at 11:14 am
[...] at Queercents loves his tax refund, [...]