Boosting My Tax Refund… On Purpose


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Maximizing My Tax Return

Back in May 2012, I quit my first ‘real’ job, and I started working at my current company on the last day of July. During those two summer months at home, we were blessed with the delivery of our first child. Once I returned to work, I was greeted with endless forms that generally accompany the first day at any new job. One of those forms took on some new significance now that we were a family of three: the W-4.

Hopefully any of you who have had a job are familiar with a W-4 form. In a nutshell, employees use the form as a means of telling their employers how much money should be set aside from each paycheck for Uncle Sam (and maybe your state gov, too) by selecting a number of allowances. I’m not going to get into the nitty gritty of IRS tables and allowances, but you can think of it like this: more allowances = more money in your paycheck and less set aside for taxes.

Most financial advice and the form itself (it is usually set up as an IFTTT exercise) aim to have the amount withheld equal your eventual, annual tax obligation, or just a little more to to avoid owing anything. By this convention, I should have increased my exemption by one at the new employer because I now had another dependent and would be able to claim an additional dependent exemption come tax time (search for ‘dependent exemptions’ and ‘child tax credits’ to learn the difference). Instead, I chose to keep my exemptions the same as before.

What does all this mean? Every paycheck I let my employer set aside a little bit more than necessary for Uncle Sam. I don’t lose that money forever; instead it comes back to me each year as an increase to my tax refund. Why would I do this? I look at it as an artificial constraint that forces me to save and live below my means. I give up a little flexibility in the short-term for a nice little payout later.

I already know what many are thinking as they read this: “Whoa, whoa, whoa, hold up. You’re just giving the IRS an interest-free loan?! You should take that money during the year, invest it, and you’d come out ahead.”

I get it. This is going to go against the grain for a lot of people. From a purely mathematical/financial perspective, yes, it probably isn’t the most efficient use of my money. Then again, personal finance isn’t a purely mathematical exercise. As much as I’d like to be a perfectly rational, emotionless robot when it comes to spending, I just don’t work that way. Life doesn’t work that way.

Here are parts of my rationale:

Splurge Risk. It might sound counter-intuitive to some, but I am generally more judicious when dealing with larger chunks of money all at once rather than an increased trickle along the way. If we’re talking a difference of $100 in each paycheck, then I’m sure life will find a way to suck that $100 out of my account every few weeks (dang Amazon!). Then again, if I’m getting an additional $2,600 ($100 x 26 bi-weekly pay periods) in my tax refund, then I’ll more carefully plan out how/where to use it. Some might argue that I should be able to budget that extra $100 appropriately. Should I? Yes. Do I? Not always.

Investing. Going with the example above, if I had the discipline to invest that extra $100/pay period at 8% (optimistic?) over the course of the year, then I would be coming out ahead by only $102.51 at the end of the year (and that is before any capital gains taxes). What if my return is less? Or what if the market goes down? This just isn’t enough upside to rationalize subjecting myself to not only investment risk, but also my own spending risk.

Fort Knox. This is the ultimate set-it-and forget-it savings strategy. By having Uncle Sam hold my money, there is no way I can get it back until I file my annual tax return. Yes, you can amend your W-4 mid-year to alter your exemptions, but it isn’t something you are going to be doing on a regular basis. Having this money outside my control is the ultimate protection from myself.

If you are living paycheck to paycheck or don’t even have a small emergency fund built up, then I would not suggest this savings strategy for you, as it purposefully limits your financial flexibility. If you feel you are doing at least OK but looking for additional ways to save or prevent overspending, then this could work for you. It is a psychological play more than a mathematical one.

Ok, but how do I do this? First of all, this is savings advice, not tax advice. If you just want to give this a try right away, you can amend your W-4 at any time. I like to save these kinds of adjustments for the new year, but that’s just a preference. If you are looking for less shock to the system, you could wait until you get a raise. By decreasing your exemptions around the time of a raise you could keep your take-home pay similar and still end up with an increased refund. My experience of adding a dependent is probably the easiest. Some companies will automatically adjust your payroll when you add a newborn to your health insurance plan, so you may have to be proactive and check your status at work.

But what if I don’t have kids or if I’m single? Again, not tax advice here, but generally speaking, the average single worker is taking at least one exemption, and a married, childless couple will probably have at least one or two between them, so there is probably room for you to make some changes.

Anyone else trying to maximize their tax refund?

Canceling My Gym Membership Changed My Life (and Budget)


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Canceling Your Gym Membership

You know those girls who frequent the gym in cute spandex outfits, striding on the elliptical machine while reading Self magazine and sipping Diet Coke? What a ridiculous sight. I’d never be caught dead doing that, except when I did exactly that every day for eight years. (Self magazine had the new secret to obtaining honed abs, and Diet Coke is delicious, okay?)

Yes, I will admit it. I was a gym junkie. Every day, I would drive on over to our local airplane hangar-sized gym, beep in with my VIP membership card, nod at the desk employee whose tank top was as tiny as his muscles were huge, and hop on one of the 500 elliptical machines available. They even had a cardio cinema room that played movies on a huge projector while people worked out. It only took one trip into that stinky sweatbox before I realized I didn’t really feel like playing the “how many people didn’t wear deodorant today?” game while working out.

Don’t get me wrong, I loved the gym for the consistency it provided in my morning. It was nice to know I could take a break and work out some stress while in a comfortably air-conditioned room, drinking a delicious beverage. And I don’t mean to gang up on gyms, because they’re a worthwhile solution for a lot of people who may live in extreme climates or big cities where it isn’t safe to workout outdoors. But when I cut my own gym membership card in half and said farewell, my life changed in the best way.

Gyms can be pretty expensive. Granted, there are some reasonably priced alternatives, but if you need childcare or a personal trainer, the costs can add up quickly. You also have to compete with crowds of people during the busy times — forget about snagging your favorite machine when the guy in the uncomfortably short shorts claims it first. And the time it takes to drive to and from the gym can be a sacrifice in its own right.

When TJ and I got married, we were DINKs (dual-income, no kids), so I was able to splurge on a gym membership without much of a fight. We lived in a very expensive area of California and spent roughly $50 each month on a tiny gym a mile away from us. It had huge mirrors on every wall, so I was treated to a lovely vision of myself red-faced and sweating for an hour next to the dozens of other people crammed next to me. It was such a habit for me to go to a gym, I didn’t even realize how unhappy I was until I signed up for my first race, the San Francisco Half Marathon.

My gym was so busy, there were strict time limits on each of the cardio machines, which meant I needed to complete my longer training runs outside. I still remember taking my first few steps on the path around the lake near our apartment. The sights, the sounds, the people! All I can say is running out in the fresh air transformed me. I had music in my ears, the wind on my face, my gross reflection not staring back at me. It was heaven! I came home euphoric.

The race itself was so much fun. San Francisco is a beautiful city, and the course took us through Golden Gate Park, Postcard Row, Fisherman’s Wharf, all the classic sights you’d expect to see while in the Bay Area. I knew after that race I never wanted to go back to the gym if I could help it. I couldn’t believe I had paid so much money to be so miserable! And the best part about running outside? Mother Nature doesn’t charge a penny.

Since then, I haven’t looked back. While I do occasionally hit up our community center to join in on a hardcore group workout session, I love my daily runs and consider them my therapy. The sunsets and sunrises, reflections of the mountains on the lake, birds singing, stars twinkling — none of that can be appreciated while stuck in a gym next to a guy who ate Indian food the night before. I even run with my kids in a jogging stroller a couple days each week, and they love to stop and feed the ducks or play at the playground near the end of my route. And TJ certainly doesn’t complain about the extra cash in our bank account each month. All in all, it’s a win for everyone.

Maybe if I were more focused on weight-lifting instead of cardio, I’d be singing a different tune. But hey, if Rocky can train against the Russian by throwing boulders into a wheelbarrow and bench-pressing logs, I can too, right?

Do you think gyms are worth it, or are the outdoors the way to go?

Reading Rainbow: Finance Edition


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Financial Books

I don’t like to read. Well, at least I didn’t. In hindsight, this is probably a good reason why I struggled in high school (along with that not doing homework thing). The Great Gatsby?! Ugh, spare me. That was all until I discovered a subject matter I could get into:…

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