Well, I finally took my own advice. And I hated it.
For years I’ve been telling people to try to figure out their yearly tax bill and pay the government only what they owe. My mantra is “No big refunds”! Tax refunds are like junk food: they taste good in the moment, but in the long term they’re hurting you. A big refund feels like free money. It’s not. It’s your own money, and you were dumb enough to lend it out for free.
But I was a hypocrite. Since I started with my company in 2003, I’ve kept my withholdings on autopilot even as I got married, took graduate school courses and had my first child. As the deductions piled up, my refunds exploded. Every year I got bigger and bigger checks from Uncle Sam. One year I got a refund that was more than $5,000 but less than $10,000 – a huge amount of money considering my salary.
This year, I actually did some research. I read a few tax books “for dummies” … (they had the right audience). I estimated my income and ran a few simulations on a tax caster. I accounted for a second child (born in late December -- just in the nick of time!). Armed with this information, I changed my withholdings, which added almost $100 extra to each paycheck. Then last week, I took out all my tax documents and nervously went to work.
Now, paying the exact right amount of taxes is about as easy as winning against the house in Vegas. But I came close. When the dust cleared, I owed Uncle Sam around $200 for 2014. I’d done it. I didn’t lend the government any money, and in fact they lent me money. I should have jumped up on the table and did an epic fist-pump. But I didn’t. I felt terrible.
The fact is, I missed that fat check. I’d come to expect it. Even though I knew that this year would be different, subconsciously I’d told myself that through some kind of magic math I would still get a big refund. But unfortunately, math is not up for debate. I’d even mentally spent the big refund that I wasn’t going to get. It was going to fund my new daughter’s 529. (Sorry, little one.)
Of course, it’s ridiculous to think this way. The fact is, I already received my thousands of dollars over the year like an IV drip of money into my paycheck. I got the money by never losing it in the first place. And for the most part, I saved it and invested the money in ETFs. And I also got to borrow $200 from the government – for free! How cool is that?
I tell this story to illustrate an important point about finances. Sometimes making the right financial decision doesn’t feel good. This is because unlike other kinds of math, personal finance has a lot of of emotion twisted up with it. Fear, stress, envy: all these affect our financial decisions as much or more than our rational minds. If emotion wasn’t a factor, anyone with a steady income stream could master their finances immediately. Everyone would say, “Yea, I’ll take my money now, thanks. I’d rather not lend it to you now then hopefully get it back next April.” If only we were so rational.
I don’t think most people can remove emotion from their finances, but we can at least control it. As much as possible, we can turn on the analytical side of our brain, do some research, and make the right decision. Like a werewolf-man who locks himself up before a full moon, I changed my tax withholdings and left it on autopilot. I’m doing the right thing, even if I hate it.