Let’s face it, we can all use more in our weekly/bi-weekly/semi-monthly paychecks. Yes, it would be difficult to walk into the boss’ office today and judiciously argue your merits for a raise with the economy in the state of disarray it is (regardless of short-term optimism). There are, however, ways in which you can increase your net income today–or just as soon as your HR Department can process the changes. They are quite easy, but do require that you give up your large tax refund which may turn some people off. What’s more, is that by getting more of your income in your paychecks, you can accomplish your financial goals faster. That last line may be just the motivation some people need to adjust the way they view their big tax refund preference
Those financial goals I mentioned? Think about this–if you have more money in your paychecks, you have more money to put toward your debt which means that you will be carrying smaller balances and therefore paying less money in interest charges. Don’t have debt? Then with that extra money you can build your emergency fun faster. Already have an emergency fund you are happy with? Then use the extra money to contribute to your retirement plan or investment account and take advantage of the power of time particularly if you invest in dividend-paying stocks. Whatever the case, when you have the money sooner, you have time on your side to help in whatever you hope to accomplish with your money!
So, how would you go about getting more money in your paychecks to accomplish those goals? Let’s take a look…
You know that little piece of paper that you filled out when you first started your job? The worksheet that you probably had no idea what to do with but knew that it had to be filled out? It’s called a W-4 and its purpose is to tell the employer’s HR Department just how much money in Federal withholding they should take from your gross salary each payday. Most people choose 0 allowances so that they can receive a hefty refund when they file their annual 1040 individual tax return, which is a huge mistake. Some see it as “forced savings”, which to a degree is understandable if you have no self control with regard to spending, except for one small fact: THERE IS NO INTEREST EARNED ON THOSE “SAVINGS”. It may be nice to see a big direct deposit in your bank account after filing your 1040 to pay off holiday spending, or fund your IRA, or even fund your summer vacation but with more and more people struggling to live on current salaries, fund retirement accounts, pay down debt, etc. why would you want to forfeit the ability to have that extra money in a savings account since anything is better than earning 0% interest? Even if you aren’t struggling, it still makes more sense to get your money sooner rather than later.
Another often overlooked method of reducing tax withholding is your employer’s Sec-125 Cafeteria Plan or Flexible Spending Account (FSA). These vehicles are ways to pay for general health- and child-care expenses such as daycare, medical insurance premiums, and most out-of-pocket medical expenses. Under such plans, contributions are exempt from Federal, Social Security, and Medicare taxes (essentially excluded from wages in the calculation of taxes). This way, you are still paying the same amount of money for medical and child-care expenses, however the earnings are not being taxed, thereby leaving more money in your net pay each period. Not all employers have established plans, so you will probably need to ask your HR Department about it or request that the issue be researched.
By taking advantage of such not-so-secret methods of reducing your tax withholding and planning for expenses, you effectively increase your net pay, and give yourself a little extra income to hopefully get your goals accomplished in a shorter amount of time.
The thing that I can’t understand is that so many people claim to be frugal, or so money-wise that they have adjusted their habits to take advantage of every dime they have, yet some of these same people give up the use of this money simply because they want that larger inflow at tax time. And, if someone claims to be good with managing their money, isn’t it a little nonsensical to use the excuse of “forced savings”? Maybe someone can explain this to me….
Why do you insist on back-loading your tax position every year? Does anyone else see the detriment of doing this when you can be using that money more effectively? Am I just being silly?