3 Reasons You Want a Small Tax Refund

Believe it or not, bigger isn't always better.

Many people are used to filing their taxes and getting a refund as a result. And this year, as of mid-March, the average tax refund was $2,933.

Clearly, that's not a small amount of money. And you may be really happy to see a sum that large hit your bank account. But here's why you should actually want a smaller refund -- not a larger one.

1. A smaller refund might help you avoid debt

A tax refund represents money you were eligible to collect the previous year but didn't receive upfront. So the less money you get in refund form, the more you might get in each paycheck you collect. And that alone could spell the difference between landing in debt or not.

Let's say you just failed to pay your credit card bill in full because your paycheck was a few hundred dollars short. That's debt you're now going to pay interest on. And it's a situation you may have avoided had your paycheck just been a little larger.

2. You might have less financial stress

When your checking account starts getting dangerously close to $0, it can be extremely stressful. A recent SecureSave survey found that 74% of Americans are living paycheck to paycheck with no financial cushion. But a higher paycheck might work wonders for your peace of mind, not to mention make it easier to pay your bills as they come due.

3. You can earn interest on your money instead of giving the government a tax-free loan

These days, savings accounts are paying a fairly generous amount of interest. So the higher your paychecks are, the more opportunities you might have to pump some money into your savings.

On the other hand, when you set yourself up for a larger tax refund, you allow the government to hang onto your money for longer -- and in an interest-free manner at that. Now, who needs that interest income more? You or the IRS?

How to arrange for a smaller tax refund

A smaller tax refund down the line could mean getting access to more of your earnings upfront. So if you want to see your paychecks increase, update your W-4 form so your employer starts to withhold less tax from your income.

Your W-4 is actually something you can change when you want to (though your payroll department may not appreciate frequent changes). It's not one of those forms where you fill it out once at the start of the year and are stuck with your selections. So if you're looking at a larger tax refund this year, you may want to make some immediate changes that increase your cash flow and give you more leeway to spend your money as you want and need to.

All told, one of the biggest myths about tax refunds is that they represent free money. They absolutely do not. A tax refund is your money that you collected later than necessary. And that's why a smaller one may be more ideal.