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Sunday, April 22, 2007

Interest-free Loans to the Gov't

Have you gotten your tax refund check yet? How much did'ja get? Did you spend it wisely?

How many times have you heard this? "Don't let your tax refund check get too large, otherwise you're providing an interest-free loan to the government."

I understand the logic. Let's say your refund check is regularly about two grand. You paid into the system $2000 more than you owed over a twelve month period, so the IRS gives you your $2000 back at the end of the year, and nothing more - in other words, no interest. So in essence, you've "loaned" the Gov't $2000 - interest-free.

The regurgitators of that tired old cliché would have you believe that you are performing this huge disservice to yourself while benefiting our country's government by providing them with money to use as they see fit, without the compensation that other lenders enjoy, such as interest.

Never mind that when lenders loan the Gov't money, they charge a lot higher interest than the paltry less-than-one percent I get from my savings account. If I sent that two grand to my bank, I'd get what? About twenty bucks? Wheeee. Break out the GOOD beer.

The theory is great, but in practice, it can have the opposite effect. Let's put this scenario to two of my friends, Trudi Frugal and Joe Average.

Trudi and Joe both get about $2000 a year from their income tax. They both regularly use it to pay down their credit card debt. They also both hear, from multiple sources, the diatribe against "loaning the Gov't money without interest." Sounded like a reasonable argument.

So they both change their withholding so that they each get $150 a month in additional spending money, leaving a more reasonable $200 refund at the end of the year.

Trudi's Story

Trudi takes her $150 per month and invests it into her company's 401(k), which has an interesting effect of lowering her taxable income, thus further increasing her spending power. Let's see how that works out for her. At year's end, and after considering her employer's match of a portion of her contribution to her 401(k), her retirement portfolio has increased the value of what would have been her interest-free loan, to a respectable amount. She was pleased with her implementation of the advice she was given regarding her withholding allowance. When Trudi retires, she'll have more spending power thanks to her new strategy.

Joe's Story

Joe, on the other hand, sets a personal goal to apply the $150 a month extra he sees in his paycheck directly towards his credit card balance. Let's see how that works out for him. The first several months, he's right on target. He increased his regular $300 payment to $450, and he's happy seeing his debt balance decrease at a faster rate. But then, as the months go on, glitches in his plan appear. One month the car needed a new battery, so he only sent in $400. Another month, his wife's hospital bill left him with enough to only pay $350, and one month he couldn't pay any extra over the $300 he usually does. In the end, he found that he only used about half the $1800 he'd "saved," (over lending the Gov't interest-free,) to pay down his credit.

Worse, the next March when he and Trudi were used to getting that $2000 check to pay down credit, instead they both got about $200, while the interest on their card balance mounted.

They both couldn't justify changing their withholding allowances to pay more than they owed, so they sucked it up and made it work somehow. But they regretted taking the advice of friends who warned against loaning the Gov't money interest-free.

They also questioned what's so bad about helping our government, but that's another topic.


One could argue that there are as many ways to justify keeping tax refund checks high as there are taxpayers. Though Trudi will see a significant benefit when she retires, there are probably far more Joe Averages than there are Trudi Frugals. The facts are that in this country, savings rates are at an historic low, and credit card balances are at a significant high. For those whose only practical savings are that refund check, they may certainly feel that the interest they're paying on those cards is a lot higher than the interest they're "losing" by "loaning" the money to the government.

Work, if you must, to convince people that they should create better money management plans. By all means it is certainly a necessity. But please drop that "interest-free loan to the Gov't" spiel as part of your argument. It really has no practical or significant meaning.

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Monday, April 09, 2007

Someone paid off our mortgage

We got two interesting pieces of mail this week from our credit union:

1) A waiver of all miscellaneous fees because our balance is greater than $100K.

That's right, our credit union states that because our cumulative balance is greater than a hundred thousand, they will now waive fees such as non-Credit Union ATM fees, stop-payment orders, overdraft service charges, etc. Cool! The only problem is that we don't have over $100,000 at the credit union. We don't even have over $20K there.

So I said to myself, OK, I am willing to let this ONE mistake slide, but the NEXT TIME this institution makes some kind of mistake on my account, Man! I am gonna be all over them!

2) A statement indicating the balance of our mortgage has been Paid In Full.

Yes, you read that right. We got our monthly statement that showed TWO payments instead the usual one. One with the regular monthly payment, and one showing a payment that equals the remaining balance on our mortgage, leaving a balance of zero dollars and zero cents. This represents a change of well over a hundred grand.

It occurred to me that I may have been a bit hasty in my resolve to jump on my credit union if they made more than that one mistake. I'm feeling more forgiving now, and I think I'll let this one slide, too.

But I swear, if they make THREE mistakes, they will definitely be hearing from me.


UPDATE - 04/21/2007:

Here's what the original statement looked like. My first theory was that it was some kind of April Fool joke. Look at the Due Date!

Now look what we got in today's mail:

No offer of any kind of explanation - no apology, just a new statement. Oh, well, for a few weeks we had "documentation" that we paid off our mortgage. Such a relief! (Though only temporary - *sigh*)

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