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A Little Self-Discipline Can Save You Some Money
By JLP | February 6, 2007
Lots of people like to get tax refunds each year. There’s something pleasant about receiving a nice lump sum all at once. I liken tax refunds to parents taking their kid’s money from them and giving it back later without interest. That’s exactly what the IRS is doing when you get a tax refund. A tax refund is exactly that: a REFUND. A refund of YOUR money.
With a little effort on your part, you could make some adjustments to your W-4 (PDF), which would allow you to keep more of your money throughout the year. It’s quite simple to fill out the form, just follow the instructions. You will then need to turn the form into your human resources department so that they can make the changes to your check. You could then deposit that extra money into your IRA or a savings account and earn interest on through out the year instead letting the U.S. government hold it for you.
Now, keep in mind that adjusting your W-4 is NOT without risks. If you claim too many allowances, you won’t have enough withheld from your check, leaving you with a shortfall and you’ll have taxes due when you file. So, you would be smart to be conservative with your numbers when filling out your W-4. Your goal should be to get your withholding as close to the amount you owe without requiring you to pay in when you file your taxes.
How much could this save you in a year?
The answer depends on how much you usually get as a tax refund. If you normally get a $2,000 tax refund, you could adjust your withholding so that you could get an additional $167 per month in take-home pay. If you deposited that amount into a high-yield saving account that paid 5% annually, you would have around $2,050 in a year’s time. (Of course you’ll have to include your $50 in interest on your taxes). No, it’s not a lot but $50 is $50. You can run the numbers yourself by downloading this Excel Spreadsheet I put together. You could have even more if you deposited your savings into an IRA, which is sheltered from taxes.
Related: Increase Your Cash Flow in Two Easy Steps!
Topics: Budgeting, Tax Planning, Taxes |