Here’s a proposition for you. Every month or maybe even twice a month you give me a couple hundred dollars. Then once a year I give you all the money you gave me back. I didn’t need the money because I haven’t spent it. I just kept you from having it for a whole year for no particular reason.
You don’t want a tax refund.
A tax refund is simply you giving the government more than you owe in taxes. If you wait for a big refund every year so you can buy something, you have done the worst type of investing. You have earned nothing on your money for a year and act like it is some kind of blessing. Even a normal savings account will give you around a 1% return.
Adjust your with-holdings.
Now is the perfect time to change your taxes. IRS tables are an estimate on how many deductions you should take but you shouldn’t always just take the deductions that apply to you. What you want to do is select the number of deductions that result in you paying the correct amount in taxes. This way you take home all of the income that you should without owing money at tax time.
You want a tax refund of $0.
The best way to ensure you are paying the right amount of taxes is to hire a professional. Services like TurboTax are great and inexpensive but please consider that your income is your greatest wealth building tool and it is very hard to build wealth when you loan out thousands of dollars with no return.
You can also use online calculators. The IRS Withholding Calculator (which at the time of this writing is unavailable) is the most accurate but there are plenty of other options like TurboTax TaxCaster.
Take control of your income.
Some people will argue that this is a forced savings plan that works for them. While I agree that it is a self-enforced savings plan, it does not work for you. If this is the only way you save money then the chances of you becoming wealthy are pretty small. Again, your income is your greatest wealth building tool and unless you are in control of it, every dollar that comes into your hand will leave it too.
I plan to do a series on taking control of your income. The first step is to actually keep some of it.
Do you usually get excited about a big tax refund?