I guess this is another thread specifically aimed at my US friends. Who has their tax return done already? Who is putting it off until the last moment?
What I really want to talk about is one of my soapbox topics...tax refunds. Now, I don't want to be political, so I'm not talking about the Economic Incentive Initiative payout. I'm talking about the idea that most US citizens have that a big tax refund is a good thing.
It is nothing of the sort! If you are getting a big tax refund, you have paid Uncle Sam too much in advance. My aim used to be to just about break even or owe a small amount of taxes. Now it's to make enough money to pay all the tax due AND the penalty for not sending it in early.
Know why I'm willing to pay a penalty? Because with the money I DON'T send Uncle Sam, I can make a lot more. Turn that around: If I DID send it to Uncle Sam, there would be what's called an opportunity cost.
You see, for every expenditure you make, there is a cost of not making the expenditure that could offer you a return on the investment. Here's a very simple example. If I had $10,000 to spend, and chose to spend it on a diamond tennis bracelet, I would have something of value. Arguably, it would be worth $10,000.
However, if I had the opportunity to spend it instead on a down payment for a house that cost $200,000 but was worth $250,000, then I would have $60,000 equity (my $10k down payment plus the $50k equity over and above the purchase price). Now spending it on the tennis bracelet would cost me $50,000. That's opportunity cost.
The same is true of any resource you have that can be 'spent'. Time for example. Writing this article costs me the opportunity of making perhaps 10 sales calls. Is it a good investment? Only time will tell.
Now, back to Uncle Sam and his completely unjustifiable hold on YOUR money BEFORE your taxes are due. Does he pay you interest on it? NO! Could you get interest on it if all you did was put it in a CD until time to pay it? ABSOLUTELY. So why in the name of all that's reasonable do you think it's a great idea to get a big tax return?
Because you haven't disciplined your spending, am I right? Time and again, I've heard people say they use it for vacation, or to pay off debt, or [your favorite excuse here]. I'm here to tell you that you would have more if you put your tax dollars to work and then paid it when it's due. If you don't know how, then let's talk about it later. I need to go make some sales calls now...
Cheri