For a lot of people, tax season is all about getting that nice fat refund check from theÂ Federal Government and, to a lesser extend, from your state as well.Â While it’s certainly nice to get this “unexpected” sum of money eachÂ and every year, it’s probablyÂ not the best wayÂ to go.Â
By getting a big refund check, essentially what you’ve done is give the Federal Government a nice interest free loan.Â You see, while you’ve been overpaying taxes and forking out your hard earned money each paycheck, the government has been taking that freeÂ money and using it for their programs.
Instead, what you should do is set up your withholdings so that when you file your taxes each year you get a very small refund.Â The reason being, instead of having to wait for the government to give you back the money that’s rightfully yours, you’re going to get that money each and every pay check – and you can use that money to help build up your wealth.
Let’s look at a typical example:
Bob doesn’t pay much attention to his withholdings because he’s pretty content to count on that $1,000 refund check each and every April.Â By back the $1,000 he has overpaid in taxes, he has not been able to put that money to work for him and has allowed the government to have a $1,000 interest free loan.
Now, if Bob would have gotten this $1,000 spread out over each of his paychecks, and put the “extra” money in a high interest savings account, he probably would have earned $30 in interest.
I know it’s not much, but it’s better than getting $0, right?
Anyway, I would definitely recommend that you talk with an accountant and set up your withholdings so that you’re simply paying what you owe in taxes and not a penny more.Â While it’s certainly nice to get that nice big check from Uncle Sam each and every year, I’d much rather have that money working for me throughout the year than for someone else.