I’m actually quite sick of hearing about this concept, to be honest. I’m tired of people bitching about struggling during the year only to receive a large refund and use it to go on vacation. I’m tired of people bitching that they pay too much in taxes and that they think the tax code the way it currently is written is unfair. I’m tired of it all, especially all of these same people leaving so much of their money in the governments hands by not adjusting their withholding properly in order to only pay the proper amount with each paycheck. Some will justify it by saying that it’s forcing them to save, but the whole concept of “forced savings” is a sham, really. How can you be “saving” if the money is never in your possession? How is it “saving” if you aren’t in control of where it is kept or even have access to it should you need it?
You have to know the common criticism that you are giving the US government an interest free loan. Sure, there is no argument against that fact other than to say that in today’s economy, the interest rates are so low that it wouldn’t matter too much. Well guess what? I don’t really care how little you will get in interest, basic math is undeniable and anything is better than a 0% return on investment. But for the sake of being original and introducing newer ideas and reasons for avoiding the big tax refund this year, I have more than just old reliable to counter with.
Like J.D. Roth mentions in his article “Every Purchase Is A Trade-Off” that there are opportunity costs to every purchase we make. I believe that theory extends past purchases and applies to every decision we make, whether it be a purchase, what to make for dinner, what route to take to work, etc. In this case, the trade-off or opportunity cost of allowing the extra money to be withheld is the ability to pay down debt or fund your short-term goals such as IRA, FSA, emergency fund etc. more quickly as well as losing the benefit of having the money work for you, particularly if you are trying to pay down debt.
My take on this:
Essentially, you are putting yourself in a deeper hole if you are already in debt. Because of the fact that you are not earning interest on the money that the IRS is holding, while still incurring interest charges on debt obligations, you are screwing yourself over two-fold. If you have ever heard of the phrase “pay yourself first”, and understand the meaning, then I hate to say, but in this case you are paying yourself dead last. If you aren’t in debt, then you are still shorting yourself by delaying the fulfillment of those shot-term goals, and losing the ability to move onto the long-term monetary goals such as padding your savings or investment ISA accounts.
It’s not difficult to track, as some people claim and all that claim is an excuse. It is just a lazy persons cop-out without explicitly saying that they don’t want to do the little bit of extra work that is required to keep tabs on a change to their budget (if they even use one). And if they don’t want to put in the extra effort, then they deserve to be screwed, plain and simple, because you only get out of life what you put in. Most employers’ payroll services can split a direct deposit into multiple locations, and if they can’t, you certainly have the ability to schedule transfers on your own so that you don’t really notice the extra money. Or, you can simply increase the contributions to your 401(k), SEP, or whatever other retirement vehicle you use at work. This will take care of not only the tracking portion of the problem, but will also help you max out more quickly.
Quite simply, there is absolutely no need to have extra withholding taken out of your paycheck. The IRS even gives you the guidelines for calculating the proper withholding based on certain factors in the form of the Form W-4. It is essentially a sign that says “adjust your paycheck so that you are as close to break-even as possible” but oftentimes is ignored, possibly due to ignorance, or the laziness I spoke of earlier, or it may be because it is intimidating and people don’t know how to do it.
Just open your eyes, be receptive to a different way of thinking, and you will see how much you are losing out on in this type of arrangement.