We get mad when someone cuts us off in traffic. We despise having to be put on hold when all we have is a simple customer service question. We don’t like being inconvenienced by having to wait in long lines. Our heart skips a beat when we finally find the love of our lives. We have anxiety when we are waiting on the results of medical testing. We have pride when our children accomplish things we only dreamed of. Let’s face it, people are emotional. Money, on the other hand, is not. If you think about all of the emotions described above, we can also find a time when human nature has invoked the same emotions when dealing with money matters.
Over the years I have worked with countless couples. While I try to meet with them jointly, there have been a few occasions when I meet with a spouse individually (this typically never works out). The one thing I can state unequivocally is that emotions are always involved. People stress over money. Why? Is it because there isn’t enough of it? Is it because you can’t agree on it? Is it because there is a spending problem? Is it because there is a budget problem? In every single case, it is because it is a people problem. We let ourselves and our own bad habits get in the way. If we have debt, why? I realize that there is an exception to every rule out there. I have heard all of the arguments. At the end of the day, the overwhelming majority of people with financial problems have those problems as a result of “emotional immaturity” when it comes to money.
Case in point: the income tax refund. Since it is tax time, this is probably the best example to use. I can’t tell you how many times I have have heard people jump for joy when they get word of their tax refund. NEWSFLASH: That is the WRONG EMOTION! Unless you are getting a refund due to earned income credit or another unforeseen circumstance, you should be crying. In essence, you have given the government an interest free loan for the entire year. Why? Why would we trust the government with our money when we have our own bills to pay? Many times when I question people about this, it all boils down to the emotion of security. Wives feel secure knowing there is money coming. Ok, I get it. I have a wife. She likes knowing things are going to be taken care of. However, she also likes knowing they can be taken care of by going to an ATM instead of waiting until March each year.
In my experience, I honestly think that most people don’t understand exactly how the tax system works. They are under the impression that the money coming out of their check each pay period is the money they are paying in taxes. That is not correct. The money that is being withheld from your paycheck is simply being withheld in case you owe the government money. Your actual tax liability is not determined until you file your tax return. In other words, the money that you get back when you have a refund is YOURS to begin with! Why not put that money into your own savings account or better yet, use it to pay down your debt. If you don’t, you are putting yourself into a position where you are loaning the government YOUR MONEY for free and you are paying excess interest on debt because you aren’t paying it down as quickly as you could.
My advice? Go to the irs.gov website and use their withholding calculator. Determine how much your tax liability has been by looking at your tax returns for the last three years. For example, if your tax liability has been $6,000 on average, then you know you need to have $500 per month or $125 per week withheld from your check. If you have $800 being taken out for taxes each month, you have $300 too much! That’s $75.00 per week! In other words, you would get roughly $3600 back in the form of a tax refund if you do absolutely nothing different, but you already know that! Instead, why not adjust your withholding so that only the $125 per week ($500 per month) you should owe is withheld and put the additional money into your own savings account, or use it to pay down your bills? In a calendar year, you will have the same amount of money as you would get back on your tax return. The difference is that you would be keeping that money in your own budget.
Even after explaining this, I have had people say “I really don’t want to change anything because I like getting that big check”. Seriously? Do you like getting calls from collection agencies? Do you like having more debt than you should? Do you like working extra hours and NOT getting to take vacations because of your financial position? The truth of the matter is that people who don’t understand money also don’t understand that they are the problem. They like getting that huge tax return so that they can do something stupid with it. The won’t use it to be financially responsible and they will continue to wonder why they can’t ever seem to get out of the hole they are in. Why not take a different approach and see if maybe, just maybe you get a different result?