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Adjust your W-4 so you have this money every month to pay down your debt and build up your savings. Getting a tax refund is not a good thing.
wait, you say your getting $2,000 back...why don't you just pay off all your cards- you will have like $650 left right?
Adjust your W-4 so you have this money every month to pay down your debt and build up your savings. Getting a tax refund is not a good thing.
who wants to play hold em in the arcade?
says who? I'm not tax law guru, but I have taken some courses on taxes. If you claim 1 (which is single) you should have 10$ withheld from your taxes.
And this doesn't go for me, but depending on your life, you get lots of credits (which add up to more of a refund), 1,000 per child (up to 4 I believe) and credits for education, a first time home buyer credit (which is actually a loan..but could still count as a credit...)
We obviously have differences of opinions on lots of things ploto.
Oh, and b2b, none of those cards have annual fees. I would never get a card with an annual fee.
Getting a tax refund is like letting the government have your money for free instead of you having it and at least earning interest on it. You want to pay in only what you will owe in the end. The education credit and standard child tax credit come off what you owe. If you owe nothing, you do not get to take them. I highly doubt you qualify for earned income credit or anything that gave you a $2000 refund after you owed no tax. Whoever told you overpaying and getting a refund is a good thing does not know what they are talking about.
Last edited by ploto; 02-12-2009 at 10:46 PM.
Refunds: They're wrong!
It's hard to get that through to my clients. But refunds are bad.
Sure, it's exciting to get a check from the Internal Revenue Service. Well, actually, it's from the Treasury, but you know what I mean. That misses the point, however.
It's not like you're gaining anything. That money was always yours. The feds are just giving it back. And that's the point.
When you get a refund, what that really means is that you've given the federal government an interest-free loan. You're just getting your money back.
In fiscal 2007, 105.9 million Americans received tax-refund checks averaging $2,324 -- about the same as the IRS paid out the year before. Either way, when you do the math, that's a whole lot of interest-free dollars.
People just don't learn. They want that check from the government. But I can give you the same deal.
I hereby offer to allow anybody reading this to send me money. I'll take cash, checks, money orders, even food stamps. Send me as much as you want. And I promise -- on my word as MSN Money's tax expert -- that I'll send it back to you on April 15, without interest.
It sounds silly when you put it that way, doesn't it? But it's no different than getting a tax refund from the IRS.
Some people argue that refunds are a great way to save money. If they never see the dollars in their checks, it's easier to put aside money for, say, that big-screen plasma TV they've been drooling over.
Open your eyes, financial fool! That's what payroll savings deductions are designed to do. Buy savings bonds or, better yet, increase your retirement-plan contributions. Or just put an extra $50 per paycheck into a money-market fund...
http://articles.moneycentral.msn.com...ds.aspx?page=1
I disagree. If I have more cash on hand I'm more likely to spend. I'd rather get a refund. Besides, in today's economy you might lose money by putting it in the bank.
This is where I stand.I disagree. If I have more cash on hand I'm more likely to spend. I'd rather get a refund. Besides, in today's economy you might lose money by putting it in the bank.
I mean, anyone can take as many deductions as they want on their i-9. Cool, not a big deal. But, then when they get their w-2 come January and they look at the amount withheld they freak out, if they don't remember (which I see all the time).
It's either spend (or save) the money now, or get it back in one lump sum.
I didn't mean to sound like an ass, ploto, and I don't doubt that whoever wrote that article you posted is 100% right, it's just two differing ways of saving/spending money..and I'm in tlong's area...I'd be more likely to spend the extra money when I got it (like on things I need) then paying off things like the credit card, which I plan on doing.
go rent a toyboy and enjoy the time....
Doesnt make a difference, if you had 10k tax withheld, say you didnt pay-as-you-go on your payroll, and throw the 10k into a deposit fund @ 5% interest watever it is....you be earning what an extra $500...which will also be tax also.
i rather have the tax withheld, then havin money in the bank and spending it, when its tax time you dont have enough to pay the tax payable in a lump sum, then your in the ters with a debt which is also charging you late fees and penalties.....
I wonder how many cards I have open currently?
I just got approved for a Chase Disney Rewards Card. ironic after Capital One declined me (hadnt happened in a while, cant wait to hear the reason for it also)
And regarding taxes....I only pay them on April 15. I make more than the penalty I have to pay, so the government, they aint getting an interest free anything from me. I really shouldnt have to pay a damn penalty for not paying quarterly, but whatever.
I need to find a way around that also.
thats why the amount thats not been taxed yet, go invest it, make it work hard to earn that next dollar.
I should clarify, I make more in various investments than I would save by paying quarterly if that makes sense.
Say my penalty is 200 bucks.
I make 250, so i'm up 50. 50 is 50 more I didnt have.
lodging quarterly man, i hate that rule
reason being if your hiring an accountant to do them paperwork cost a fair bit doing it 4 times a year compared to doing it 1 time at the end of the financial year. Even though the accountants services are deductible, but it....
Closing the accounts would be a flat out horrible idea and I'm suprised to hear people mention it in here.
Do NOT close them off, just pay them off and keep them with a zero balance. Actually even keeping a small balance is better than a zero balance in certain situations.
Obviously the best case scenario is to save the money instead of having the government over withdraw from your account. Now, that being said on something in the area of a 2k refund we're talking about a loss in interest of MAYBE 10-15 bucks annually.
Its not a big deal at all and some people are far less likely to save. For them losing out on the 10-15 dollars is actually the financially responsible route to take.
I guess ideally you'd try to get a higher limit and better interest rate, and if there are no annual fees I guess it doesn't hurt to keep them, but at some point when you have more than a couple of cards, with similar ages, it's not a big deal to drop one.
I didn't take any hit by dropping Chase, but it wasn't my oldest account.
You and I are on the same page here however if she had a 400 dollar limit and a 250 dollar annual charge then 22% interest isn't worth the benefit of keeping the account open and not using it. Thats what I was driving out. Most 22% type cards are of the high risk variety and carry hefty annual fees and charges.
I see she said she didn't have any annual fees so that's a good thing and with that in mind she can probably keep the account open however I would try and get a card with a lower rate to take its place. The meager benefit from having an additional 400 dollars of available credit pales in comparison to 22% on even the most minimal balances. No sense in "living with it" for 15-20 additional FICO points that she could make up in less than a years time with a better card.
Exactly. I only have about 1500 in total available revolving credit. I got popped with an unexpected 23.99% and promptly paid the card off and closed the account when they wouldn't come back down to my original 9.99. My FICO was relatively unaffected.
Ok, so back to this.
Where this fails on a practical sense is that it pays no attention to cash flow.
What has been pointed out is that your refund will allow you to pay off this debt entirely, so the following answer assumes that the payment doesn't exist, but that you have some spare cash each month to send to them.
The best thing to do is to roll your extra cash into the smallest debt first until it is paid off, then move on.
This has the effect of freeing up cash flow, i.e "improves free cash flow". This means that if something comes up in any given month, you will be more likely to have cash to pay for it rather than having to borrow more.
You will end up paying slightly more in interest than simply throwing everything at the highest interest debt, but unless the differences are really great, or the amounts really large, it won't make that much difference. For most the free cash flow is more important from a practical sense than a few extra dollars at the end of the year.
This is a case where the difference in the interest *IS* great.
One important concept from the accounting/finance disciplines that is relevant here is the marginal "cost of capital".
This is the cost of your options. On one hand, you can use any given spare dollar to pay off a credit card, at 22% interest, and on the other, you can essentially loan it to the government for free until you get your refund.
The difference here is 0-22%=-22%
If you are worried about having the money around to spend if you adjust your withholding allowances, then after you finish paying off the cards, do the following:
Set up an automatic purchase of "I series" savings bonds from the US Treasury. Basically you can debit any amount you want deducted automatically, and buy a US government bond that pays around 5%, currently 5.64%.
http://www.treasurydirect.gov/indiv/...bonds_ibuy.htm
These bonds are 30 year bonds that can be redeemed, without penalty, after 5 years. If redeemed between 1 and 5 years, you lose 3 months worth of interest. You can't normally redeem it in under 12 months.
This is a better rate than any CD currently offered (see bankrate.com for samplings of bank rates), and is, barring the US government defaulting on its debt, risk-free.
You can buy up to $5000 per year of these bonds, $10,000 for a married couple.
This is a great way to put aside a small amount each month and earn some decent, GUARANTEED returns.
At the end of the bond, you get your capital back, and that transaction is tax-free, by the way.
If you max out your savings in these bonds, at the end of 30 years, you will end up owning $150,000 of this, and earning about $5,000 interest plus the cashout of the bonds, or roughly 5000 per year.
If you choose not to reinvest it, the cash flow will taper off, as you stop earning interest on the redeemed bonds, balanced out by any increases in prinicipal returns caused by the probable increases in the cap (assuming you always max out your purchases)
Last edited by RandomGuy; 02-13-2009 at 10:10 AM.
This is a good automatic way to set up some savings, earn a decent return, and after a year or so, you pretty much have access to that cash at will, with only a modest penalty that disappears after 5 years.
The FIRST segment of ANY decent savings plan, even before considering retirement, is cash. I am big on cash, and recommend to anyone having a at least six months, if not a full year's worth of expenses sitting around in CD's or these types of bonds.
You can also, after you max this out, simply do a similar thing with CD's from your bank. Put a few bucks every month automatically into a CD with a bank, and have that cash flow as well.
Alternately you could simply do a monthly search/purchase from some website like bankrate.com, if you have the time to spend, and go that route. Usually, the less time you have to spend on a savings regimen, the more likely it is to be carried through, long term.
Once you have the cash, then you go full bore into the stock market with a self-directed Roth IRA.
Yeah, that's right, I said the stock market. If your time horizon is anywhere past 10 years or so, buying stocks right now is a no-brainer.
If you aren't technically savvy, then simply go for big name companies that have a great history of paying dividends, like Coca-Cola. If you buy this stock through one of those IRA's you can automatically reinvest dividends at no charge.
The beauty of this, is that if the stock market goes down, and takes the dividend companies stock prices with it, then that is actually good for you, because you are able to buy more shares with your dividends. Look up "dollar cost averaging" for more details.
Mutual funds are ok, but the loads they put on them, both up front and hidden means that they have to make really great returns over time to make up for the management fees, and mutual funds overall don't really do that well when compared to the overall market.
So I don't think the obvious question has been addressed... why not pay ALL of the cards off immediately?
My wife and I made some STUPID decisions about 2 years ago, wound up $22K in debt, and I was pretty depressed about the situation. We consolidated everything to 2 cards (with 0% interest for a year) and then closed everything we had consolidated about 3-4 months later. We worked our asses off and made sacrifices to get out of debt and now that we're debt free, things are great. We got used to paying $400-$600 per month towards this debt (plus any bonuses, income tax refunds, etc) so now we're basically employing the same tactics (a little leeway of course) without the debt to pay ourselves what we were paying the creditors. We're getting a $10K 2 year CD next week to (almost) pre-pay for a trip to Italy in 2011 -our last "hurrah!" before we have kids- and will not ever put ourselves in that situation again. I use a low interest, fee-free rewards card to pay for everything possible and pay it off once every other week online so we can ac ulate travel credits while paying for things we normally would use a check/debit card/cash for.
It took me 2 years and thousands upon thousands of dollars to acheive this and you don't want to commit ~60% of one income tax rebate?
Pay off ALL revolving debt; carry a single card that gives a reward you value (took a Disney vacation "Free" two years ago by using the Disney card for 5 years - now I've got an Amazon card) - put everything you can on it, and NEVER carry a balance.
Wife and I were stupid for the first 8 years of our marriage, but have been revolving-debt free for a decade. Only money I will borrow is for a mortgage, or an auto (if I get a rate <5%); otherwise it's cash. Makes it much easier to sleep at night.
People who don't have any cards are missing the 1-3% reward you get from those cards.
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