Bad tax refund habits

The start of a new year means it is time to start filing taxes sooner or later. In the United States, the final filing deadline is on April 15, while in Belgium it’s somewhere during summer.

The majority of all people usually get a tax refund, in the United States, about 80% of all are receiving a refund this year. Most people treat a tax refund as if they’re getting paid and are throwing it out of the doors. Although, it’s mostly money you’ve overpaid to the government.

Spending for tax refunds

What is even worse is that most people hunt for tax refunds. In Belgium, there are a couple of bad tax deductions for a pension saving funds, pension savings insurance, real estate, electric cars and solar panels. What those people are not realizing is that they are grabbing the announced tax rebates they are getting, as an incentive. But in the end, they’ll end up owing that money back to the government.

If you visit the link of the pension saving funds, you’ll get a clear example of why you shouldn’t use tax efficient retirement savings vehicles.

The Belgian government was giving very generous rebates for solar panels. A friend of me also installed solar panels, he invested around 20000 EUR to have his solar panels installed and have the installation certified. Now it turns out, that he has to pay an annual tax of 482 EUR. Let me be clear, that my annual electricity bill is 780 EUR, and we are heating everything on electricity.

There is no way he would earn back the cost of the solar panels. Even though, people were already estimating it would take between 10 and 20 years to earn back the solar panels. This doesn’t even remotely sound like a good investment to me, but people were just hunting after the tax rebate.

Having worked for one of the largest accountancy firms in Belgium, I was also told that there is no such thing as a good deal, there’s always a catch.

What bad habits?

Cars

Tax refund: car
Bad habits 101: Buying a car with your tax refund.

If you get a tax refund you may be wondering what to buy with it. You probably didn’t know that a tax refund can actually cause you to get into debt if you go on a shopping spree. This becomes abundantly clear in the U.S., most people start shopping for a new car in March and April. You’ll find plenty of used cars on the market.

But when people purchase a new car, it usually comes with a loan, as more than 50% don’t have adequate savings to pay for it out of pocket. When they buy a used car, they usually don’t account for any of the unexpected repairs that may arise. I remember when I purchased my Ford Mustang 2010 for 9000$, but had to get a loan for it, I would have paid around 4000$ in interests over the course of 5 years.

People are very materialistic, and buy things to improve their social status. But the truth is, buying a new car will not improve your social status. It might impress friends or family for 1-2 days. But after that, you’ll most likely start to regret your purchase when your real life gets back to you. Personally, I’d keep using my car until it’s really no longer cheaper to keep driving it vs buying a new one.

I honestly had loads of fun driving a Toyota Camry 2004 with more than 400000 miles on the odometer. It had tons of cosmetic issues, but we didn’t have to worry about repairs, scratches or a monthly payment. If you do happen to purchase another car, I’d never take on a loan that’s longer than 3 years.

You shouldn’t be spending the tax refund either to go on a trip, regardless whether you’re drowning in debt or not. If you’re in debt, you should be prioritizing to pay off the debt with the refund first over anything else. Belgian home-buyers use their tax refund for anything but that too. Then again, interest rates in Belgium are historically low below 2%, so I’d prioritize investing the money instead and build passive income.

Look at your situation, regardless of where you leave, and try to figure out what the most responsible decision is if you have debt. But paying off the debt first is certainly always a good choice.

Food

When you suddenly have a lot more money in your checking account, there is a very likely possibility you’ll either start spending more on groceries or you’ll start dining out more often.

When I was working 80-85 miles from home in Tampa, I was staying at Airbnb hostels and couldn’t really cook. So I went to eat out every day for about a month at Chipotle, sushi or Tacobell. I was spending about 900 USD per month on food.

In Belgium, I’ve set a monthly budget of 150 EUR per person. This is a very reasonable amount for an average monthly net salary of 2000 EUR.

If you’re going to be dining out, be careful not to turn it into a habit, it happens faster than you think, and the money disappears without you noticing. This is what we call a financial leak. The money gradually disappears over the course of the month, it’s just a bit more than usual. But because it’s spread out, it’s unlikely you’ll even notice it.

Retail

There is always going to be a new iPhone or MacBook Pro. But if you have something that works, you shouldn’t be replacing it. And truth to be told, iPhones are too expensive regardless where you live or your income. The high-end smartphone range is getting increasingly expensive with no real improvements.

If we’re actually looking closer, we’ll find that the mid-range smartphones around 300 USD / 300 EUR are the best value for your money. My Huawei Honor 10 takes awesome pictures.

But don’t ever plan on buying things when you get a tax refund. This is basically the worst habit as you’re already planning where the incoming money is going to. You may even lose sight of other things that may need more attention, such as paying of any debt or building an emergency funds. You could also contribute your tax refund to your IRA or an equivalent tax efficient retirement savings account.

How did we spend our tax refunds responsibly in 2019?

Instead, it’s important to use your tax refund to get ahead of the game. Here are a few things you probably should be doing with your tax refund. Below you’ll see the chart of my family’s net worth, and I want you to look closely at the ‘Investment’ series.

In 2018, you’ll see two large jumps around April 2018 and November 2018. This is where I’ve received my American and Belgian tax refunds. I won’t go in details how much it was, but can you see how much of a difference it made?

Early 2018, I was depositing roughly 300-400 EUR per month on my investment accounts on average. Given the size of my tax refund, I got ahead by as much as 1 year in meeting my retirement goals by simply making these deposits. Then I’m not even thinking about the capital gains and interests accrued over that period.

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