Caitlin's Corner

Save the Most Taxes Today, or Save More Later?

Around this time of year, one of the internet's favorite debates is about the tax refund: should you celebrate a big refund, or does it mean you did something wrong?

The answer could be a little bit of both.

First, you should understand that when the tax policy changes in a pretty dramatic way halfway through the tax year (looking at you, OBBBA), you're more likely to be in a position of having over or under-estimated your tax bill for that year. So, if your tax bill wound up being way off from what you expected, give yourself some grace.

Getting a tax refund is something you might get excited about, and there's nothing wrong with it! But here's why you might consider rethinking your tax strategy if you've received a big refund:

1. A large tax refund usually means you paid more in taxes throughout the year than you needed to. In effect, you gave the IRS access to your money without earning anything on it.
2. If that money had stayed in your account instead, you could have used it to build savings, invest gradually, or simply improve your cash flow month to month.
3. Consistency matters a lot in our long-term behaviors. Investing smaller amounts throughout the year (often called dollar-cost averaging, or "DCA") can help you stay disciplined and reduce the pressure of trying to “time” the market.
4. Just as importantly, it’s easier to build a habit around steady investing than it is to make a perfect decision with one large refund check. Plus, let's be real about the temptation we have to spend on bigger rewards when we get that lump sum refund check. This is why a refund is way less likely to be invested than a monthly amount of savings.

If Your Refund Was Bigger Than Expected:

If you're a salaried employee, it could be worth revisiting your W4 (this is the form you file with your employer that determines how much tax money needs to be withheld from your paycheck throughout the year. It's possible that you need to update your withholding if you want to avoid a similar refund next year.).

For self-employed individuals, the reason for a large tax refund could be an overpayment of quarterly taxes throughout the year. There's not a cut-and-dry solution to this; many people feel better about estimating their future income in a way that doesn't give them any big tax surprises at the end of the year. This is understandable, and another reason why the big refund debate is nuanced.

Regardless of how you make your income, you might also wind up with a tax refund because of a major life change (e.g. having kids or getting married), or having qualified for one or more refundable tax credits. If you know a major life event will occur and you want to account for that in your withholding, you can update your expected filing status, or change the number of dependents you expect to have in the next tax year.

It’s also worth acknowledging that our emotions play a bigger role in financial decisions than we often realize. (Shocker! I'm bringing emotions into this discussion 🫣.)

If you love getting a tax refund, that’s okay. What matters is that it’s a conscious choice, not an accident. A small refund is normal, but a consistently large one can make it harder to put your money to work toward your goals throughout the year.

Save More Now or Save a Lot Later?

When we sweep away the hype around the tax refund, we're left with the reality that having a tax strategy and a financial plan is the best thing we can do to take away surprises, and to make our money work for us in the best way. A good financial plan doesn't shoot to save you the maximum amount of taxes today; it aims to create the maximum tax savings over your lifetime.

What I'm Reading

📕 There are literally thousands of articles out there about how to spend your tax refund. They all explore more or less the same themes, which I mostly agree with:

1. Fund your emergency savings
2. Pay off high-interest debt
3. Fund your retirement
4. Address other financial goals (such as education or down payment savings, etc.)

📗 I love this article that suggests age-based themes for helping kids have a healthy relationship with money. When I read pieces like this one, I always tend to reflect on my values around money, and how I want to model those to my children. This is an evolving concept for me, and I'm glad to see others finding it important as well.

📘 In honor of earth day, I came across this fascinating piece, which dissects the origin of the term "tree hugger". Before being politicized in the US in the 60s, the term was actually inspired by villagers in India who were trying to save their livelihood and prevent the commercial exploitation of hornbeam trees. They were taking a page out of Gandhi's nonviolent protest book, and the world noticed.

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Next Up:

May. 6, 1pm Central

​Making Sense of Inflation: What It Is, Why It Matters, and How to Respond​​

We hear about inflation nonstop, but how does it really work, and when does it become a problem? We’ll break down what’s going on right now, how it impacts your day-to-day life, and what you can do about it. Susan will bring her $20 billion Zimbabwe bill (you read that right) as we look at what happens when inflation goes completely off the rails.

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