The American public have turned the income tax refund into a type of status symbol - the bigger the refund you get, the more forunate you are. What we have forgotten is that the refund is nothing more than the federal government telling you how much of YOUR OWN MONEY you get to keep. And the current average tax refund on individual tax returns is in the neighborhood of $2,345. That means you are giving the government an interest free loan of $45 every single week. Who is the fortunate one - you or the government?
Here is a way to potentially double the amount of money you will have to spend this time next year. The only reason I say potentially is because the tax laws change each year along with people's family size, filing status, etc. But I do guarantee you will have more money to spend next year than you do now by practicing a very simple discipline.
Take the amount of the refund you are receiving or have received this year and divide it by 52. Then round that number to the next highest $10 amount. For the average taxpayer this would equal out to $50. The strategy is simply this, take $50 and put it into savings every week until April 15, 2010. Using a very simple savings account with a 2% interest rate, within one year's time you would have deposited $2,600 and earned interest in the neighborhood of $26.
Some of you may argue that you don't have $50 to deposit each week - I beg to differ. You currently pay an average of $45 every week (more if you count medicare and other deductions) without batting an eye and you still manage to pay your bills. Why? Because it is taken out first!!!
The wealthiest people in the world have become wealthy because they learned the concept of paying themselves first. As soon as you get your paycheck, deposit the $50 first and then live on what's left. You will quickly realize that this isn't very difficult to do. If you are paid biweekly instead of weekly, deposit $100 every two weeks instead of doing it weekly. Just make it the first priority payment of every check.
Here's a way to make it even more exciting. You know you are paying approximately $45 too much each week to the federal government. Meet with you Human Resources/Payroll person of your company and submit a new W-4 so that this $45 will be left in your paycheck. Add this to your deposit and watch your tax day refund grow even faster. By the end of 52 weeks you will have deposited $4,940 and earned interest in the neighborhood of $50.
If someone is going to earn interest on your money, it may as well be you, right? And the best part is you won't have to guess whether or not you are going to get a refund and how much it might be. Just check your savings account to see! And even better, if you happen to end up owing on your taxes next year because of changes in your situation or tax laws, you won't have to scramble to come up with it. Just pay it out of your savings account and pocket the rest.
Doesn't this seem like the more intelligent way to get a tax day refund? I challenge you to give it a try. Let me know if you do!
Now, if you are worried that you wouldn't be disciplined enough to leave that money in the account, especially if an emergency comes up (like that big screen T.V. you have always wanted going on sale at Best Buy), there are simple ways around that, too. For example, open your savings account in a bank that is not convenient for you to get to like, perhaps, one on the other side of town. Set yourself up so that you can only make manual deposits and withdrawals - no debit cards and no online banking. This way you will think twice about making untimely withdrawals.
Remember, this will only work if you leave the money in the account. Treat your savings account as if it was the National Treasury. You can only take out the money on Tax Day 2010 and not a day before!
Other ideas on how to increase your refund for next year include:
- Save money by having an experienced and educated friend help you prepare your tax returns and pay them less than you pay a professional tax preparer
- Deposit your savings in an account with a larger interest rate like, perhaps, a money market account or mutual fund. Just make sure it is a low-risk account.
- Educate yourself on the tax deductions available to business owners and the advantages they bring. Start a business next year to take advantage of these benefits. Home-based businesses are a great way to earn extra income and reduce your tax rate!
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