Better cash flow is a challenging priority for many Americans. Budget constraints affect the ability to meet monthly expenses and improve quality of life.
While getting another job or trimming expenses often involves much effort, increasing the allowances on your income tax withholding is an easy pay raise.
Here are some things to consider before upping your allowances:
Use a Tax Withholding Calculator:
Simply put, those receiving a tax refund are having too much money withheld.
Using a withholding calculator helps increase allowances without underpaying taxes and owing money to the IRS.
The Time Value of Money:
You should consider the time value of money when choosing W-4 allowances.
Having additional money withheld from your paycheck is an interest free loan to the U.S. Treasury. This may be a budgeting tool for some taxpayers, who feel lower paychecks force them to save wisely throughout the year.
However, electing to withhold more taxes may overlook the power of compounding for investments and debt reduction.
Money has time value, which in basic terms means a dollar is worth more today than at some point in the future. Investment managers such as Elliott Broidy commonly use this principle, but you can also benefit from the concept.
Added cash flow from each paycheck can be applied to credit card debt for reduced interest expense.
Mutual funds with low minimums or direct purchase plans are a few of the options available to smaller investors.
With more disposable income, you can take an important step towards investing, which is simply getting started.
Psychology of Money and Summary:
Anticipating a tax refund is an emotional high for many consumers. When a tax refund arrives, this excitement could cause impulsive spending with little long term benefit.
Holiday spending in particular receives a boost from consumers who leverage refunds to make purchases.
By understanding the value of money from time and emotional standpoints, you can make informed decisions to improve your personal finances.