Why Getting a Small Tax Refund Isn’t a Bad Thing

We’re approaching the end of tax season here in America, which means you should either have received your tax refund already or you’re filing for it soon. Most of us are secretly crossing our fingers that we’ll stumble upon an extra grand while filing our taxes, but in reality, receiving a hefty tax fund might be a sign that something’s wrong with your finances.

Let’s talk about why getting a small refund is actually a good thing.

Big Refunds Mean That The Government Was Using Your Money

Think of it this way: if a bank accidentally gave you $6,000 when they loaned you $5,000, you’d get an extra grand to use without paying interest. That’s hugely beneficial. When you overpay your taxes and leave your money with the government, the same thing happens. You’re loaning out money without making any kind of profit.

If you had put less towards your taxes and accepted a smaller refund, you could have used that money to invest in real estate or stocks. Additionally, you could have put more money each month toward your loan payments, thereby increasing your net worth. Maybe you could have built up a bigger nest egg or paid those doctor’s bills when you needed to.

Refunds aren’t giveaways – the money was already yours. The government was just holding your extra payments until tax season rolled around. Why shouldn’t you just keep that money from the beginning?

You Should Never Rely on Your Refund

Many Americans go into “holiday debt” during the months of November and December. As a result, they look forward to their annual tax return as an emergency fund of sorts. The issue with this plan? Tax refunds can vary dramatically depending on numerous factors, including the economy, government, and personal life changes.

It’s a better idea to keep that tax money from the beginning and use it to build an emergency fund in a high-yield savings account. That way, you’ll have the money right when you need it without worrying about your refund’s arrival date.

How to Keep Your Tax Refund Small

Now that you know to avoid large tax refunds, let’s talk about how you can handle your money earlier on in the year to reap the biggest benefits. When you get your next paycheck, figure out how much your employers are taking out for taxes. They might be taking out an extra $100, which then contributes to your hefty refund.

Fortunately, this is an easy problem to solve. Visit your HR office to discuss changing your paperwork to take out the appropriate amount for taxes. Keep in mind that you definitely don’t want to pay too little towards your taxes. More than 21 percent of taxpayers didn’t have enough taken out of their paychecks this year. Leave an extra chunk of change in your tax payments to avoid owing money at the end of the year.

If you’re worried that you’re paying too much or too little when it comes to taxes, speak with a professional tax advisor. Finding out exactly how much you owe in taxes can improve your budgeting, help you get out of debt, and generally improve your financial picture.

To Sum It All Up

I know, getting a hefty refund after going through the arduous process of filing your taxes seems like a giant reward. If it happens, great! But next time, think about what you could have been doing with that money if you’d had it seven months ago. Would you have tackled your loans more aggressively? Would you have put that down payment on a house?

Big refunds aren’t all they’re cracked up to be, so don’t let the media or friends fool you.

Why You Should Start Paying Attention to Your Net Worth NOW

Even if you make $200k a year, you can’t consider yourself “wealthy” if you don’t know your true net worth. A high salary doesn’t always correspond to financial well-being, especially if you’re not tracking your spending and paying attention to your debt.

Not sure what net worth is? It’s nothing complicated. Simply put, it’s the sum of everything that makes you worth something (financially speaking). Add up everything of value you own and the funds you have in cash and investments, then subtract any debt you have to calculate a comprehensive view of your money.

Now that you understand the concept of net worth, let’s talk about why paying attention to yours is vital if you want to stay on top of your finances.

It Helps You to Look at the Big Picture

Knowing that you have $7,000 in the bank isn’t helpful if you don’t know how much money you have in debt. On the other hand, some people have less cash in the bank but own several valuable investments or pieces of real estate. Therefore, you really can’t understand how financially successful you are until you see your net worth, not just a number in your bank account.

Additionally, net worth allows you to think long-term. It’s something you measure on more of a year-to-year basis rather than month to month.

Net Worth Allows You to Track Your Progress Over Years

Even if you track your spending weekly, you should take time every year to evaluate how your overall worth has changed and why. This will help you build a more complete understanding of your finances and what affects them, especially debt and investments.

According to The Balance, there are certain net worth goals we should all have at different points in our lives. For instance, by the age of 30, the site’s experts recommend that your net worth at least equivalent to half of your annual salary. I am more more aggressive. In a perfect world, you’ll have $250,000 saved by age 30. By age 40, it should be worth two times your annual salary.

Obviously, this is somewhat subjective, but the point is that everyone should set long-term money goals for themselves, and net worth can help with that.

You’ll See How Much Debt Weighs You Down

As I said before, a high salary and loads of money in the bank won’t make you a wealthy person if you’re weighed down by monumental debt. Sometimes, the only way to see the true impact of your credit card debt, car payment, and house mortgage is to add everything up. For example, you could have half a million in the bank but only be worth $100,000 if your debt is dragging you down.

Add up all of your investments and cash, then subtract all of your debt, including good debt (mortgages, student loans, etc.) and bad debt (credit card payments, car loans, etc.). Then you’ll get an accurate picture of your real financial worth.

The Bottom Line

When it comes to personal finance, your bank account is only a tiny portion of your monetary wealth. There are a million other things to consider, and a comprehensive breakdown of your net worth will help you evaluate everything.

If you’re not great a math, you can easily have the website Mint calculate your total net worth for you. Just add all of your accounts, from investments to credit cards, and then watch as the site begins tracking everything. Even if you don’t use it for daily transaction monitoring, it’s great for watching your net worth’s changes over time.

How to Stop Comparing Your Finances to Everyone Else’s

I recently read The Millionaire Next Door by Thomas J. Stanley and William D. Danko (which I highly recommend), and one of the biggest themes I walked away remembering was the concept of ignoring others. That’s not to say that being wealthy requires you to treat others unkindly. Rather, the process of true wealth requires you to quit comparing your finances, purchases, and achievements to those around you.

If you consistently find yourself jealously eyeing your neighbor’s new car or wishing you could make as much money as your older sibling, most financial gurus would agree that you’re holding yourself back. Not only is envy an ugly color for everyone, but it’s also a distraction that prevents you from making achievements of your own.

It’s impossible to totally ignore the success of others, but everyone should try to steer clear of coveting what others have. Not sure how you can possibly do that with others flaunting their good fortune in your face? Here a few tips.

1. Spend Less Time on Social Media

Although you might not think that Instagram, Twitter, Facebook, and other social media platforms have any bearing on your financial habits, they actually do. Every time you see a picture of some celebrity driving their brand-new car or a friend going on an expensive vacation, you’re asked to compare your finances to theirs.

Furthermore, social media actively encourages us to spend money and engage in compulsive buying. Your apps are constantly influencing your buying decisions, even if you don’t realize it.

According to The Next Millionaire Next Door , most millionaires spend 2.5 hours or so each week on their social media accounts. That seems drastically low when compared to the whopping 2.5 hours per day that most average users engage in. Perhaps their dedication to accumulating wealth discourages them from wasting time, or perhaps their ability to disengage from social media plays a role in their financial success.

2. If You Need to Compare, Look at Your Past Versus Your Present

Sometimes, comparison is necessary and healthy. For instance, it’s extremely smart to keep track of your finances so that you can see how far you’ve come in 10 or even 20 years. From now on, when you feel tempted to compare your success to that of others, consider comparing your current financial situation to your previous ones. Have you made progress? Where have you grown? Where can you continue to improve?

You’ll find that self-evaluation is much healthier and productive than envying those around you. Not only will it force you to better your finances, but it will also give you an appreciation for how far you’ve come over the past years.

3. Realize That Shiny Toys and Grand Lifestyles Don’t Equate to True Wealth

The average American household is at least $5,700 in debt. Together, all of the consumers in the country carry a staggering $1.003 trillion in credit card debt. Chances are, when you look at that friend who just bought a glittering new Mercedes, he didn’t pay for it in cash. Don’t assume that having the latest gadgets or the biggest house equates to a high net worth. For all you know, those people you envy are knee-deep in loans they’ll struggle to pay off for years.

What It All Boils Down To

Building wealth has nothing to do with the success of your neighbor or the failure of your coworkers. True wealth comes from dedication and self-control. Remind yourself of that when you start to covet the belongings and lifestyles of those around you. Reign yourself in and focus on your big goals, not what others have.

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