About That Tax Refund . . .
How you use your tax refund provides a litmus test for your financial discipleship journey. When you get a little extra, how do you use the money?
Why do most people get refunds? Tax withholding levels are generally a little higher than needed. The government has wisely discerned that it’s easier to engage someone if you have money for them rather than wanting money from them. Charitable givers who itemize get larger refunds because the government participates in our charitable giving through a tax deduction. (Thanks Uncle Sam!)
There are four primary camps on how to use tax refunds:
Shrink It – Stop withholding so much so you earn interest rather than loaning it to the government interest free.
Spend It – Splurge on something big or memorable with the windfall.
Give It – Make a one-time gift to someone in need or your favorite ministry/charity.
Invest It – Pay down debt, add to the emergency fund, or invest for retirement to make meaningful progress toward financial health.
Shrink It?
I might as well make it easier on the “shrink it” crowd by only making them read half the blog before they fire off an angry comment. A big refund makes saving easy and benefits many people. Most of us are often our own worst enemies when it comes to financial discipleship. To combat that reality, we need to establish habits that lead to financial health and vitality. James Clear, the author of Atomic Habits, encourages us to make habits easy. Securing a refund that can be allocated each year involves filling out your withholding in the simplest way possible just one time. What could be easier?
I know there may be some legitimate reasons to shrink your future returns by investing in something that will yield a little interest. I’ll spare you the paragraph I originally intended to put here—with all its detailed accounting scenarios—and conclude that shrinking your return is usually not worth the effort. But there are three scenarios where I would consider it:
I need the money to meet basic needs (which means there are some bigger issues to address).
I have a lot of high-interest debt that needs to be paid off.
I haven’t contributed enough to my retirement plan to earn the company match.
Spend It?
When in doubt, as many stewardship blogs will admonish, don’t pick Spend It. As the Shrink It section above notes, a large withholding is an easy way to save money with minimal willpower. To spend it on regular items defeats the purpose. If it wasn’t worth putting in the budget in the first place, don’t use a windfall to fund it.
Give It?
This must be the answer, right? It’s the stewardship blog equivalent of the “Jesus” answer in Sunday School. Still, I’d be cautious about incorporating my tax refund into my giving. Giving is about more than just surrendering the dollars. It’s also about how the gift impacts the giver’s discipleship journey. Using my tax refund as part of my core giving feels more like “last fruits” than “first fruits” giving. Listening to God as we wrestle through how to increase our giving and limit our spending seems like a much better path to Christlikeness. Could God call you to use the refund to make a special one-time gift toward a Kingdom cause? Absolutely! But maybe it should be treated as a special call rather than a regular practice.
Save It?
Using your refund to fund emergency savings or pay down debt is the best practice (unless, of course, the Spirit gives you another plan). We look to our emergency fund first to make sure it meets its pre-established goal. We need to replenish any amount we’ve tapped into and increase its target by the rate of inflation each year (which will usually be nominal). The rest of the refund should go toward paying off any debt (starting with high-interest) and paying bills in full rather than interest-only. Even if the only debt you have is a mortgage, consider making an extra payment in the amount of your refund. Making extra payments shortens the mortgage life and saves you interest. It also gives you a burst of momentum toward paying a little extra every month and becoming debt-free.
Does It Matter?
Making the tax-refund decision is one of the mundane choices we make in the moment that can free us up to be more generous when opportunities arise. Our ability to answer that call comes only by making wise stewardship decisions every day that ultimately preserve and multiply our assets for Kingdom purposes.
