Improving cash flow is a challenge for many Americans. Increasing your income may take time and depend on several factors, such as where you live or work experience. Cutting costs beyond the obvious can also be difficult. Aside from less lattes and mall raids, your budget may not have much leeway.
So, how can you quickly improve cash flow with minimal sacrifice? Increasing your tax allowances may be the simplest solution.
Here are some things to consider before doing so:
Review your W-4 Withholding:
Tax season is upon us and many folks are eager to receive refund checks. With the average refund nearing $3000, our good intentions often give way to impulse purchases.
Simply put, those receiving a tax refund are having too much money withheld. If you receive refund checks yet struggle to set money aside, upping tax allowances may be an answer.
Tax Withholding Calculator: Using a withholding calculator helps increase allowances without underpaying taxes and owing money to the IRS. You can find a calculator online at the irs.gov site.
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. The logic is lower paychecks force them to save wisely throughout the year. Unfortunately, this often doesn’t happen. (More on this later)
This approach may also overlook the power of compounding. What is compounding? In a nutshell, investing or paying down debt in smaller sums today has greater results than larger but infrequent payments.
Money has time value, meaning a dollar is worth more now than at some point in the future. Institutions and mutual funds may use this principle, but you too can benefit. How?
Ways Extra Cash can be used:
- Reduce Interest Expense on Debt
- Start Investing- Low minimum mutual funds or direct stock purchase plans are examples
- Set aside an emergency fund
How would you use extra money in each paycheck?
With more disposable income, you can take a big leap towards better finances: Simply getting started.
Psychology of Money and Summary:
Tax refunds are an emotional high for many consumers. When refunds arrive, the excitement may overshadow more practical options. Holiday spending in particular, receives a boost from consumers who leverage refunds for emotional buying. You may strike a better balance of how money is viewed and spent with higher pay throughout the year.
Each situation is different. Please speak with a tax professional as needed.