In honor of tax-day (I hope you all are on time this year!), here's a bit o' stolen advice from one of my FAVORITE blogs, Stodgy is Sexy. Copying is the highest form of flattery, you're welcome!
Yesterday’s post reminded me of an important point that I feel is underplayed in smart financial planning – ALWAYS try and correctly estimate your tax withholding, especially if you are carrying credit card debt. The goal is to get ZERO tax refund at the end of the year, NOT a big refund. This is not to say that you shouldn’t take advantage of all your deductions; on the contrary, you should spend as much time as possible thinking about how your lifestyle is being praised or punished through our Byzantine tax code and take as full advantage as the law allows. But you should plan ahead so that your withholding is the lowest amount possible over the course of the year.
Why? Well, let’s say that you expect to ultimately get a refund of $3,000 at the end of the year. That means that you have had an extra $3,000 withheld from your paycheck and kept by the government over the course of the year. But if you had received that money in each paycheck and put it in savings paying, say 3%, you would have made $90 in interest. I’m sure you are a patriot, but you are already paying your taxes. So why would you want to give the government an interest free loan of $3,000 instead of making $90?
Now let’s also imagine that you are currently carrying $3,000 or more in credit card debt at, oh, 15% interest. That debt will cost you about $450 in interest charges over the year. So, in this scenario, your interest-free loan to the government doesn’t just cost you $90 in lost interest. It’s more like you have charged $3,000 to your credit card and handed it over to the government for a year, resulting in you losing an extra $450.
So please – take the time now to estimate the deductions you will qualify for over the course of the next year, and use any extra income to put your financial house in order. The Federal Government will live on without your generosity.
