With tax season in full swing, people from coast to coast are finding themselves either happily or unpleasantly surprised by the size of their refund. Here's a simple method to help increase the size of your refund while also making a point about personal financial responsibility.
I was a teenager when I took my first job, cooking and topping pies in the kitchen at a local pizzeria. My first job also meant filling out my first W-4, and, admittedly, I didn't understand all the official terms and numbers right off the bat.
One of the assistant managers, a man who was younger then than I am now, walked me through filling out the form and gave me an extra piece of advice. "You should try and put something on the 'additional withholding' line," he said. "You'll get a lot back when you do your taxes. It's like having a mandatory savings account."
How it works
For those just learning to save money, however, the following method of assisted saving can be an eye-opener. Here's a guide to using additional tax withholdings to condition yourself as a saver:
- Draw up a quick budget. Add up your monthly rent, utilities, food, personal care and entertainment expenses. It's usually OK to estimate, you shouldn't have to keep receipts for a month to get a fairly accurate figure. If you're a teenager living at home, like I was, this step should be easy.
- Calculate a reasonable percentage of your per-period income. My assistant manager friend advised me to withhold an extra one-eighth, or 12.5%, which worked fine for me. Divide the number of hours in a pay period by eight, then multiply the result by your hourly wage.
- Write your calculation down on line 6 of your W-4. This strategy, I was told, works best for employees filing non-exempt with one personal allowance. Many people who want to learn to save fall into this category, but check with someone if you're exempt, married or caring for dependents.
If you budgeted properly in step 1, you should now be on your way to assisted saving without any trouble meeting your regular obligations. Watch your additional spending and make sure you don't go too far over budget or get into credit card debt.
Why it works
The idea is simple: it's hard for you to miss money that was never in your check to begin with. Novice savers who have full control over the crediting and debiting of their savings accounts might fall victim to the temptation of withdrawing for frivolous expenses and never realize just how fast savings can build up when they're left alone.
When tax time comes, your big tax refund will show you what can happen when you put aside even a small percentage of each paycheck. The lesson can make a more achievable goal out of saving in personal accounts to meet targets you set for yourself.
A significant number of people use their tax refund as the down payment for a big ticket purchase or to take a chunk out of their credit cards with money on them. Assisted saving through tax withholding can show you that those lump-sum luxuries are available to you any time of the year when you know how to save money.
My refund that first year was about $500, if memory serves. That number made quite an impression on a kid working a part-time job all those years ago, when minimum wage was under $5 an hour. I hesitate to speculate on the ballpark size of a comparable assisted-saving refund these days, but I suspect it would make a pretty similar impression.
The original article can be found at MoneyBlueBook.com:
How your tax withholdings can teach you the power of saving