I have talked before of our move to the beach a few years ago and how we made it work for us. Sure, our rent almost tripled by moving here, but somehow we were able to make ends meet. It made me wonder where all the money was going before! But anyway, one of the ways we got some extra money every week was to reduce the amount of money withheld from my paycheck – so when I did this, my paycheck went up about $300 every other week – or $600 a month. That helped a lot! Of course, it was a big mistake that later came back to bite us when taxes were due, as I did not have enough withheld to cover my tax burden for the year – so I owed a couple thousand dollars come April 15th. Not good.
At the time, we were exchanging a bigger weekly paycheck for a possible tax issue come tax time. I thought we were far enough off from the end of the year that I could make up for it by slowly putting money away in order to pay any tax bill. Of course, that didn’t happen. It’s not that we didn’t have the money to pay the bill, but if I had been smart about it I would have either left my withholding the same as before the move and/or actually put money away over the the year to pay my tax bill. But I did neither and I learned from my lesson.
We were just trying to figure out how much money we needed to pay our newer higher rent and now that we have been here for a few years, our tax withholding is back to where it should be so we don’t owe money at the end of the year. It took that big tax bill to make us change our ways, and even when I was getting the smaller paycheck we were still able to eat – so I probably did not need the money in the first place that I thought we needed. Oh well, you live and learn.
I guess the important thing here is to make sure you are not over-withholding but you are also not under-withholding – both are bad strategies. If you get a big tax refund every year, you are giving the government and interest-free loan all year long – time that you could be investing that money on your own and at least making a few extra bucks on it. If you owe money every year, you are keeping too much for yourself and you could owe them a lot of money along with some possible penalties. Either way, you lose. That is why it is so important to find that balance between the two – you pay the Tax Man but you also keep what is yours. Sometimes it takes an experience like we had to learn the lesson, but I am glad I learned it now while I had the money to pay the man!