- Bargaineering - http://www.bargaineering.com/articles -

Adjust Your W-4 Withholdings

Over two years ago, one of the first Devil’s Advocate posts I wrote was that you shouldn’t adjust with your payroll deductions [3]. Back then, as it is now, conventional personal finance advice told you to adjust your withholding so that you don’t have too much tax withheld from your paycheck.

How do you adjust your withholdings? You adjust your withholding [4] by submitting a W-4 to your company’s HR or payroll department with an updated number of exemptions. To determine how many exemptions you should put down, I would use the IRS Withholding Calculator [5] because recent laws have made numerous “rules of thumb” obsolete.

Now that you know how, let’s talk about why!

Pay Off Debt

The immediate benefit of adjusting your withholding is that you’ll have more money in your paycheck. If you’re in debt, this new found money can give you a much needed boost in catching up and paying off that debt faster than you planned.

For example, if you have $10,000 in credit card debt at 17.50% APR, it would take you 5 years if you paid $302 a month towards the debt (with no other spending). If you were to increase that monthly payment by $40, you would be done in 4 years. If you were to increase it by $108, you cut it down to 3 years. Not only that, but by increasing your payment, you pay less overall interest over the life of the debt. So $40 a month doesn’t seem like a lot but if you put it towards your debts, it can have a fantastic effect.

Save the Difference

If you don’t have debt, treat the added cash as a bonus each month. You can take that cash and invest or save it. If you have savings goals you hope to accomplish, such as saving towards 529 plans or an emergency fund, then this extra cash can get you there faster than you expect. You can lock in some of the best CD rates [6] with investments as small as $1 nowadays, which is a great way to earn a slightly better interest rate with zero capital risk. It might not seem like a lot but every little bit counts, especially nowadays.

Taxes Are Enough!

Finally, this is a philosophical reason but paying taxes is enough. I’m all for paying my way and fulfilling my obligations, I recognizes taxes are a necessary evil and that they help pay for the freedoms and liberties I enjoy, but I don’t really want to give the government an interest free loan too!

Do you adjust your withholdings? If so, why?