April 15th is a bad day for paperwork (and accountants) but a lot of people seem weirdly excited for the results of tax day, don’t they?
“I’m getting a huge tax return this year so I’m going to use it on that trip to Europe I’ve been wanting to take!” I get it, I love getting a huge tax return as much as the next guy!
Here’s what’s funny. We are getting excited about a perception. We perceive that we are getting this huge payday once a year and it feels soooo good, but consider this.
The money your company withholds too much of is the equivalent of you giving the government a 0% interest loan for an entire year.
Last year we got nearly $3,000 back (partly due to some educational credits on Bailey’s part for college courses) which was sooo nice since we were preparing to purchase a house. But that was $3,000 that I could have been collecting my own interest on throughout the year.
What are you missing by not changing your withholdings?
My interest rate for my savings account is about 0.5%. This means that on $3,000, I could have earned $15 in interest (give it up for free money!). And that’s about a third of the interest rate I was looking at a year ago. Better yet, if I invested that money in a Roth IRA, I could have made somewhere between 7-12% ($210-$360) in interest. What could you do with $15? Or $210?
Are you like many people and enjoy optimizing your money? Do you use credit cards for the points you’ll earn? Do you switch bank accounts so you’ll receive an extra 0.2% return on your savings?
My point is this: optimizing your earnings by getting a higher interest rate should be no different than optimizing your withholding tax so you take home everything you can without paying anything extra to the government the following year.
A $0 tax return means you made the most of the money you have.
If you want to optimize your money, go to the HR person at your company and request some help determining how much you need saved back so your return next year is near $0. It’s not as fun on April 15th, but it’s much more fun throughout the year. I would change my taxes any day if it meant I could earn an extra $210 for doing it.
I like tax refunds so I get why people want to ensure they have a lot of money coming back to them every year. But consider what you may be missing!
Like what you read? Give me a follow in this little box below.