It’s a great feeling when you get a raise, suddenly there is extra money in your paycheck to put towards your budget. Many Americans can have this experience right now, yet purposely choose not to!
What am I talking about? Tax withholdings. If you are getting a large refund (over a couple hundred dollars) from the IRS each year, you are withholding too many taxes. Many people choose this as a type of “Savings account”, because the thrill of getting a lump sum is great.
However, this is a terrible Savings account! Not only does it give you 0% interest, you also can’t access the money until you file your taxes (this is feature for some).
Smart money planners should instead adjust their withholdings to only take out the amount of taxes they truly need to pay, and invest the rest. Even owing a little money the first year you adjust is ok if you plan correctly (this is kind of like a reverse refund, where you are borrowing money from the government at 0%).
If you adjust your withholdings (less equals more money), you’ll have more money in each paycheck. It’s important that if you do this, you setup some sort of automatic deposit into Savings so you don’t actually have access to spend this money. Not only will doing this build more savings for you, but it can also help you grow your emergency fund quicker. Just make sure, especially the first year, that you have an amount in savings that will fully cover any amount owed. If you owe taxes and can’t afford them, the penalties involved in this will outweigh the benefits in most cases.