How To Get An Instant Pay Raise

As a gentleman was leaving my class recently, he wanted me to clarify something I had said. He was making sure that he should take his four or five thousand dollar tax refund and pay off debt.

I was stunned. This money represented $400-$500 that could have been in his pocket every month. A survey of some friends this week revealed one who was getting back $2800 and one getting $3300 back this year.

The average tax refund this year is $2379. Clearly, I have above average friends.

Getting a large tax refund (over $500) means you are having too much money withheld from your check every pay period. Quite frankly it means you are managing your money poorly.

Many people use this as a forced saving plan and it does not make any sense. You are loaning the government YOUR money, interest free. Every $1200 in refund is an extra $100 per month you could have used to eliminate debt or invest for your future.

I'd venture to say that most people who do get large refunds could use this money every month to ease their debt burden. This burden frequently leads to late charges higher interest rates and a lower credit score. Instead, they like the feeling of getting that big check in the mail and figuring out how to spend that chunk of money.

As with anything related to your personal finances, do the math. Let's take our $2379 average tax refund as an example. Assume you had that much on a credit card charging you 19% on balances. Over the course of one year, paying only the minimum, you'd waste over $400 in interest charges. Multiply that by 10-20 years and you can see the long term harm of big tax refunds.

If you get a big tax refund then you should adjust your allowances. The more allowances you claim, the less money is withheld from your check for taxes

Here are two ways to get it right. Take the time to complete the appropriate worksheets included on Form W-4. The worksheets will help you determine your withholding allowances based on your income, adjustments, deductions, exemptions and tax credits. The worksheets can help you figure the right amount so you don't have too little withheld.

The W-4 is a good start but probably not enough. The worksheets do not include calculations for all the credits available.

Search the IRS.gov website for "withholding calculator" and fill it in. This will get you as close to where you want to be which is owing or getting back as little as possible.

If you need more help ask your payroll administrator at work or an accountant.

Keep your money working for YOU!