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If you
are feeling proud of the tax refund you snared after a
weekend of working on taxes, I have some bad news for
you.
You might
have blown it. Although people love getting refunds, a
refund typically means you wasted your money.
Why?
When you
get a refund, it means you paid too much in taxes
throughout the previous year. So at the end of the year,
the government has to send some of it back to you after
you file your tax return. That, of course, means that
the government has had the benefit throughout the year
of spending and investing your money. And you didn't get
the full value of the money you worked so hard to earn.
Consider
this: Let's say you just found out that you are entitled
to a
$3,000
tax refund. That means you overpaid your taxes by
$250
a month during the year. And you made the government
happy, because Uncle Sam invested that money and earned
interest while you got by each month with less of your
own money.
Now
think, instead, about how you could have used
$250
a month to get rid of your credit card debt in 2009. If
you don't pay off your cards completely each month, you
are being cruel to yourself — maybe making yourself
pay
25 cents
a year for every
$1
you spent. But you could have been more kind to
yourself. If you had received
$250
a month instead of letting the government have it, you
could have paid
$250
more than the minimum payment on your credit cards.
That's the way to remove the noose from your neck fast.
Or, let's
assume that you put
$250
a month from your paychecks into a savings account. And
around mid-year you invested the
$1,500
you accumulated into a CD paying 3.5 percent. Instead of
getting the
$3,000
refund from the government after filing your taxes, you
will have a total of about
$3,050
because of the interest you earned.
That's
not a huge amount of money, of course, but it's better
than wasting it. Or to think of it another way, if you
saw me on the street today, and I handed you a
$50
bill, would you be happy or uninterested?
Of
course, this gets even better the longer you keep your
money invested. Let's go back to the original
$1,500
and assume it stays in a CD for five years. That will
give you about
$1,780
. It would be even more if you invested
$250
every month, but I'm assuming you spent about half of
your money.
Incidentally,
if you invest
$1,500
this year and another
$1,500
for the next 20 year, you will have close to
$50,000
in your CDs — maybe a lot more as interest rates go
up. So think about that when you do receive your refund.
Invest it now, and add more money to it each month.
Now, it's
important to act so you don't let Uncle Sam have this
money instead of you during 2010.
1.
Contact your payroll office at work today and tell them
you want to change your W-4. That's the form that tells
the government how much of your pay to withhold from
your paychecks. Add exemptions to the form so you keep
more money. But don't overdo it. Although you don't want
a refund when you do your taxes; you also don't want to
find out next February that you need to send Uncle Sam a
check for the 2010 tax year. This calculator will help.
2. Make a
plan to invest the money you save. You can put it in the
bank in a CD, and find the best interest rates at www.bankrate.com
by clicking on the CD tab at the top of the page. Better
yet, if you have a 401(k) at work, start putting extra
money in that with each paycheck. Maybe you think you
can't afford to do this. But changing your W-4 will
leave you with extra money to invest each payday. And,
frankly, you just proved to yourself that you can live
with less of your money. You did it all of 2009, and
your refund proves it. Now, make that money work for you
upfront.
One final
note: If you did get a juicy refund this year, make it
count. Allow yourself to use maybe 10 percent to treat
yourself; then use the rest to pay off credit cards, set
up an emergency fund, or start an IRA to save for your
future. For more help on investing a 401(k) or an IRA go
here.
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