Should you use taxes as a forced savings account?
RAPID CITY, S.D. – With tax season in full swing, some people might consider using taxes as a forced savings account. The idea is to overpay in taxes, resulting in a larger return, which can then be used as savings or investments. However, is this strategy a good idea?
The Upside
The more you overpay in taxes, the larger your return will be. If you have issues with spending too much money, using taxes as a forced savings account might not be a bad idea. It can help you put money aside, and when you receive your return, you can use it as savings or investments.
The Downside
According to Saeed Sulaiman, owner and financial advisor of Shield Financial, “A big refund can either be a great idea or a bad idea. The reason it’s a bad idea is that you’re giving the government an interest-free loan, where if you had saved that money yourself, you could be gaining interest on it, and it could be kind of working for you, you use it throughout the year, or you’ve been saving it.”
In other words, if you overpay in taxes, you’re essentially giving the government an interest-free loan, which is not the best use of your money.
What Should You Do?
If you can handle putting money away into a savings account or retirement fund, that is always the better option. However, if you tend to get the feeling that extra money is burning a hole in your pocket, using taxes as a way to force yourself to put money aside could be a good thing.
“You have to know yourself. If you know that you’re not going to be stocking away money every single month, then it’s probably a good idea. Go ahead and make it even more. Put more money in. Take fewer withholdings so that more of the money is going in every single month, and then you’re going to get even a bigger refund,” says Sulaiman.
When it comes down to it, only you know your situation and what you can and can’t handle. So, think about what is the best way for you to save money.
