I wrote a post quite awhile back on my Savings Advice blog about checking your withholding, especially if you generally receive very large refunds. The post is on this blog too, here . I think tax season is a good time to evaluate whether getting a large refund is really worth it. We have had our share of them over the years. In the beginning, I just couldn't figure out how to avoid them. It just happened it seems. Well, in truth not really in most cases. It really comes down to knowing how to calculate how much you should have withheld based on your expected salary and other factors. The IRS has a calculator to help you figure this out. And it is free!
If you are trying to take control of your finances and get out of debt, this change to your withholding could actually mean more money in your pocket each time you are paid! That means you would have MORE money to work with each month to pay down those debts. It could mean getting a debt paid off sooner, and paying less interest on that debt. That would be a huge relief to me personally.
Now, I'm going to call you out. Somebody reading this is saying to themselves "but I won't have a big refund in February, and I wanted to buy X." Really? You want to stay in debt and have more stuff? Yes, I get a new sofa, bathroom makeover, vacation, Playstation, or carpet all sound really good. But you really, really need to look and see if that item is something you would have bought at any other time of the year. Would you have spent the amount equal to your refund last June for that same thing you want? Why not? Oh, you are in debt and don't have any money? Who's money do you think this is that is coming to you in this big lump sum? It is YOUR money. You do have that money, but you have been sending it to the government who doesn't need it for free each month and letting them hold it for you, again for FREE. Banks actually pay you interest if you park money with them.
The average tax refund is $2,651. If you had that money in your pocket each month you would have an additional $220.92. Nice huh? What would you do with it if you were receiving that much EXTRA each month? I suppose some could go to that debt goal you might be working on. Maybe you could increase your emergency fund with a little. Or even save some for that thing you want to get. If there were four goals you are working on, you could just divide that extra in fourths and use over $55 each month towards meeting each of them at the same time.
I challenge you to consider how you could plan your finances if you had that extra refund money in your hand each month. It's okay to dream about it. Think and ponder it. Mull it over. Get excited! Okay, and a little scared knowing there probably won't be a big refund the next year. If you get an emergency fund set up, you will have money to fall back on every month, rather than waiting for that one time per year to save you. There really is freedom and security in having less debt, and more savings. Again, I dare you to at least try the process on paper of changing your withholding (on the W4) and planning your budget with more money in your pocket each pay period.
Tell me about how it goes. Did it make you feel motivated with your goals? Were you excited or scared?
P.S. If you need help calculating your net paycheck amount based on the new withholding amount, check out Paycheck City for a free calculator for hourly and salaried workers.