Tax Refunds: Bonus or Bogus?

It's that time again! My friends are announcing the thousands they're getting back from their taxes and what they plan to spend it on. Vacations and new gadgets mostly, less often paying off bills, but all of them look forward to this every year, cashing in on what feels like free money. It's about as close as most of us will get to what it feels like to win the lottery!

But someone told me a few years ago that getting back a huge tax refund is not such a good thing. You feel like you're getting one over on the feds, but they're really taking advantage of you: In effect, you're loaning that money to the government for a year without getting any interest back on your investment. I'm just learning about this big girl money stuff, but even I know that a 0% return is no good! Sure, it may not be much: A 5% return on $1,500 after one year is only $75. But if there's one thing I keep reading over and over again in my quest to become a money maven, it's that the small amounts add up.

Still, some of my friends make a good point: If that money was included in their paychecks throughout the year, they probably wouldn't save a dime. Ooooh, yes, don't I know it! If the money's there, I spend it. If it's deducted before I get my hot little hands on the dough, I never know it's missing. So even though my friends aren't earning interest, they're using federal withholding as an automatic savings account, socking away more money than they would on their own.

I think the best option is to open a high-yield savings account online – E*TRADE offers a 2.51% interest rate and no minimum balance – and set up automatic transfers when your direct deposit hits your checking account. With the money put away before you even notice, you won't know what you're missing. And revamp your withholding so you're not giving up more than your fair share.

As for me? Well, I'm following the tried and true advice to pay off my debts before seriously investing in savings – getting rid of 25% interest charges is a bigger priority. And since I owe a bit to the IRS, any refund goes directly to them – good thing, because I don't need the temptation to spend!

What about you? What will you be doing with your refund? What's your savings plan?