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Restructure your Paycheck and Own your Life

Picture this: you go to the grocery store, and purchase $20.00 worth of groceries. You pay with a $100.00 bill. The clerk hands you a receipt, but no change. You keep the receipt, and nine months later, go back to the store, complete four pages of paperwork to prove the money is yours, and the store’s manager hands you your $80.00. Is this a good deal? Most of you would answer, “No way!”

People would never allow a store to “borrow” their money for a year, but thousands of working people in the United States allow the federal and state governments to borrow their money for free and believe they are getting a bonus when they finally get it back. That “bonus” is called the “tax refund.”

Like the example of the store, a tax refund represents the amount of money that was overpaid to the government by way of payroll withholding. Not only does the government not pay any interest on the money they have borrowed from taxpayers, but taxpayers also lose the opportunity to use that money during the year to enhance their daily lives. The overage extracted from every paycheck could mean the difference between living in debt or being debt-free, funding a retirement account versus depending on Social Security (if it still exists), or being able to pay a utility bill or two, have car repairs made, or take a vacation. Does receiving a big tax refund still look like a good idea?

The optimal situation for any wage earner is to owe zero in taxes and receive zero as a refund. If you currently receive tax refunds that are consistently over $100.00 every year, you need to make some changes to your financial strategies.

The first step to make is to establish how much you overpay Uncle Sam every month, and then change your withholding allowance accordingly. For example, if you received a tax refund last year of $1200, you overpaid $100.00 every month. Divide that by the number of paychecks you receive every month. If you are paid on the first and fifteenth of every month, then you overpaid $50.00 each paycheck. Have the payroll department help you calculate what number of dependents you would need to declare in order to increase your take-home pay by $50.00, and change your W-2 form to match. This allows you to pay exactly what you owe the government in taxes – no more, no less. You’ll get to use the money you’ve earned when you earn it, rather than a year later.

Next, apply the extra take-home pay you receive to pay off any debt you carry. If you currently are paying the minimum on several credit cards, pay the additional $100.00 plus the minimum toward eliminating the balance on your highest-interest credit card. As long as you don’t add more charges onto that card, you should be able to pay off the debt quickly. Once you’ve paid off that debt, close the account, tear up the card, and do the same thing to the next highest card balance open. When you’ve successfully eliminated all of your credit card debt, you can prepay other debts such as your mortgage or car loan. This one change can move you from being owned by the bank to living debt-free.

Another consideration is to begin funding a retirement plan. You may be in your twenties now and retirement seems to be a long way off, but starting early allows you to start small and let the magic of compound interest work in your favor. If you’re a little older than twenty, start anyway. That extra $1200 every year can earn interest between 3 to 5% in the most conservative (safe) investments, such as CDs or I-bonds. Just be sure that the interest you earn is either tax deferred or your fund serves to help reduce your tax liability, such as an IRA or 401(k). The primary advantages to a self-directed retirement plan come from ownership; you can tap into it in the event you are disabled prior to retirement with a minimum of red tape, and any proceeds that are not paid to you at retirement can be passed on to your heirs in your will. Try that with Social Security.

The main point is this: don’t think of the additional income you’ll get with this method as “free money” and spend it; live on the income you’ve gotten used to having, and use the extra to eliminate your debt obligations and build a future. You’ll lower your stress level and improve your quality of life dramatically, all on the income you have right now.

Too many people are intimidated by the IRS and thoughts of an audit, willingly relinquish their income, and live from hand-to-mouth as a consequence. It’s time for the American taxpayer to take back the income that is rightfully theirs and make the government ask for it. After all, who shows more sense when it comes to spending your money?

This article was written by Jean Fritz.