Tax Refunds. You're doing them wrong.

Tax Refunds. You’re doing them wrong.

It’s that time of year again.


For most people, tax time is a complete bummer. Uncle Sam forces you to sit down and look at your finances, and either feel really good or unusually bad about what you accomplished financially in the past year. This time of year generally ends with pure euphoria (tax-refund) or crushing defeat (you owe taxes). Most Americans will procrastinate and refuse to get their taxes taken care of until they realize how poorly they would do in jail. Here’s why:

As a society we are pretty uncomfortable being face to face with our financial picture, and for good reason. We suck at money. 

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It’s so bad that it’s almost comical really. Imagine millions of financially under-educated people crunching numbers in a sad, failing attempt to “outsmart” the government and get some kind of weird bonus check that came out of your own money. By the time you file your taxes, the IRS has already played you like a well tuned violin. You spent the entire year loaning money to Obama with no interest, just to have to turn around and try to prove through detailed and painfully annoying documentation that the government took too much money from you. They hold all the cards, made all of the rules, and you are supposed to do a trust fall that you will get back every penny that you deserve! The sad thing is, many of us choose to believe in the system.

Have fun with that, and please let me know how Unicorns smell up close.

Oh, and because of our poor financial literacy, we are pseudo-forced into paying someone else or buying a program to do our taxes for us. It’s capitalism at it’s finest, and I fully support people making money off of my lack of education. It’s my fault for not taking the time to figure out how to do it well on my own. Concepts like this make the American financial system work.

I could go on and on about taxes and why they suck, but that’s not really the point of the article. Also, don’t get me wrong, I understand that taxes are important, and really appreciate having a sewer system instead of bed pans. I also like roads. I get it.

The concept of taxes actually bothers me much less than the concept of tax refunds, because the refund is indicative of the average American’s poor spending and saving habits. We spend everything that we make and don’t save anything. Fortunately, once a year the magical money fairy gives us some unexpected cash, usually in a decent amount. $3,539 is the average refund in this country, and we like to use every drop of it. Here’s a question that isn’t asked very often: what if you invested your tax refund rather than blowing it every year?

I know that this is shocking, because your tax refund is to be used to purchase random stuff for no reason. Period. It’s really almost a law at this point. But, before you fall for Amazon’s brilliant “We’ll give you 10% extra if you put your refund in the form of Amazon gift cards” marketing scheme –  hear me out.

Remember that average tax refund of $3,539? Get ready, because I’m about to show you the power of investing, interest, and time. Take that refund and invest the entire amount into the stock market every year for the next 30 years, or your entire working life if you are a Millennial like me. IRA, ETF, mutual fund, brokerage account, whatever. Pick your poison. If you use it in an investment platform and average a 10% return, this is what you would end up with after 30 years:


I’m sure some people are reading this thinking: What about taxes? What about fees?! You can’t guarantee that return! I don’t get that much back!! You can’t do that, what if you need to spend that money on an emergency instead?

Here is how I would respond:

1) You could grow it tax deferred in an IRA.

2) Find an ETF that doesn’t charge fees (Charles Schwab and others have this option).

3) No, I can’t guarantee the 10% return, so lets try 5% instead to make you feel better. $246,883.48. That’s still a bunch of money. Next.

4) If your refund is $1,000 a year – $180,943.47

5) If your refund is $1,000 a year at 5% – $69,760.86

6) If you are using your tax refund as an emergency fund, then it’s time to find a new blog to read.

7) Even if all of my numbers are wrong or inflated, you still will have put away anywhere from $30,000 – $106,170 after 30 years if you had just put your refund in a regular savings account with no gained interest.

I’d rather travel here when I’m retired than waste my refund.

All of these numbers don’t include reinvested dividends or account for a portfolio that is really strong and performs above 10% per year. These numbers could be even higher, and none of them are small sums of money. I guess what I am trying to say is this: It’s hard to justify that investing your refund every year is not a good idea. If you reverted to any of the naysaying above, then you are just trying to make yourself feel more comfortable about spending your refund uselessly and want to remain in the poor to average financial brackets. Or, you are wealthy already and I’m not sure why you are reading my blog, but please donate money or something. I’d much rather build my net worth than buy random junk on Amazon, but what do I know? I’m just a teacher.

Instead of looking at a tax refund negatively like I have the past few years, I am going to start looking at it as a forced savings account. If I had access to the money all year, I may have wasted it on frivolous wants. The government forced me to set aside money, and I have the choice to spend it differently when I get the money back. I’ll start to invest it, and 30 years from now we can compare bank accounts. Hopefully if you listened to me about this topic, we can have a long argument over who has a higher net worth instead of a really short discussion that leaves you angry. 🙂

What do you think? What do YOU want to do with your refund this year? I’d love to hear your opinion, let’s talk about it in the comment section below!

Live differently, your bank accounts will thank me later. ~ M$M

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9 comments… add one
  • Brian @ Debtless in Texas Mar 4, 2015, 4:17 am

    I hired a tax pro to do my taxes this year (LLC, house, capital gains, etc.) and was happy to do so. He is a wizard and it turns out we only owe ~$480 this year despite us making more income vs the ~$920 from last year. After years of messing around, we finally have our deductions right where they should be…us keeping that extra $$$ for investing and only having to pay Uncle Sam a little.

    I never thought about sitting down and doing the numbers on the refund, good wake up call MMM!

    • Millennial Money Man Mar 5, 2015, 2:00 am

      That’s awesome, I will need an accountant next year…tax situation is going to get more complicated as well. Good accountants are well worth the cost!!

  • Financial Samurai Apr 2, 2015, 10:08 am

    That is some big compounding there!

    I had to shell out a bunch of money this year, but as expected since I didn’t pay any withholding taxes for my freelance income.

    Feels good to owe a lot actually!

    • Millennial Money Man Apr 3, 2015, 8:20 am

      I was surprised the numbers were so big too! Pretty cool.
      If you owe a lot, that means you MADE a lot.

  • Anonymous Jun 18, 2015, 4:48 pm

    One year I went to pick up my tax return and sitting in front of my account I was informed that I had $80K in taxes due. Oh S***. I ask, in a load tone, HOW CAN THAT BE? That’s when my account told me that I had made approximately $250K. But wait there is more, as if having to pay $80K was not enough, I was also informed that I had to start paying quarterly. Tack on another $20K to the tax bill, all due at the same time. Lucky for me, because I worked so many hours making the income I did not have the time to spend it. So I had the money to pay.
    You are so right! If you owe a lot, that means you made a lot. What a problem to have, but it does not make the pill any easier to swallow.
    Now I keep a close eye on my tax situation.

  • Daddy Bumblebee Jul 8, 2015, 5:49 am

    I agree with the sentiment, but would probably disagree at some point on the implementation. I actually used to work for a CPA as a tax preparer, and he said someone’s goal shouldn’t be to get a big refund, but to withhold enough to cover their tax burden. So yes, the IRS is like a savings account, but you’re forfeiting up the opportunity cost of what you could have done with that money during the year. Sure, you can still invest it.. but it’s out of the outflow of your discipline to not spend it vs being mandatorily taken from your paycheck each month.

    So, if someone doesn’t have a lot of financial discipline, tax withholding is a good start. For the rest of us, getting a refund should be a painful reminder that we couldn’t invest/paydown debt/save/etc with it for whole year. At which point adjusting our W-4 may be in order… (


    • Millennial Money Man Jul 8, 2015, 1:08 pm

      I’m with you, my goal this year is to not have a tax return at all. This post is more for people that do a 1040EZ and take the standard deduction. If they don’t really monitor their taxes and are going to get a return regardless, might as well not waste it on useless junk in my opinion.

  • Chuck Mar 8, 2016, 1:19 pm

    I used to be one of those people. This year we’re adjusting so that we won’t get a refund anymore. Now that I have better discipline, I’d rather free up the cash flow up front than have a forced savings account. Now, if I was still one of those people, you make a very powerful point about investing the refund and growing net worth.

    • Millennial Money Man Mar 8, 2016, 8:39 pm

      Yeah it’s kinda tricky – a lot of people don’t even realize what a tax return is. Things are a little different for me now that I have an accountant and own a business, but I’d still like to try to avoid giving anything more to the government than needed 🙂

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