This post is going to be short and sweet. I have two Winning Moves to share with you, both which allowed me to stop giving interest free loans and in turn, earn additional returns on my savings.
Since we recently walked through some advantages of financial independence here and here, I thought it was time to share more moves I’ve made to get me closer to my FI goal. Hopefully, one or both of these will get you to take the same action, or motivate you to find a winning opportunity in a different area of your life.
Update Your Tax Withholdings
Winning Move #3
When I started at my current job, my life was a little bit different than it is today. At that time we were a two-income family with no children and rented our apartment. Today we are a one-income family with two children and a mortgage. These huge life changes have drastically impacted the amount of income tax I have to pay. I knew I’d realize some tax savings from these changes and even budgeted for a huge windfall from our tax return.
This week I finally got around to updating my W4. In case you’re not aware, a W4 is the form you fill out for your employer to calculate how much of your income they will withhold for taxes. Filling out the form took about five minutes. It actually took longer to figure out where to go on my company’s intranet to find it.
The result: my take home pay increased and my tax withholdings decreased. In total, I’ll pay the same amount in taxes.
So, you may be wondering why this is a winning move.
When you withhold too much from your wages, you get a bigger refund at tax time. Many do this on purpose because they like a gift from government. It’s important to note that this refund is not a gift. It’s your money. If your withholdings are too high, you are lending it to the government for free.
Unfortunately, I had been giving the IRS an interest free loan. After my withholding adjustment, I now retain the tax savings from the events listed above every two weeks instead of receiving a refund the following year.
The sooner I receive this money, the sooner I will invest it. I have a system in place to get this money invested right away. The longer I have my money invested, the more dividends and capital gains I expect to earn. I estimate this change alone will earn me an extra $514 per year.
If your life has changed since you last set up your W4, it also may pay for you to revisit it.
Remove Your Mortgage Escrow
Winning Move #4
When you buy a home with a mortgage, many times the bank collects real estate taxes and home insurance as part of your monthly payment. They then pay these bills on your behalf as they become due. This process is called escrow. It gives the bank confidence that all these necessary expenses are being paid.
The financial impact to the consumer is you are paying these costs earlier than necessary. This fills up the escrow account until the expense needs to be paid. The bank even keeps a buffer amount in your escrow. For example, I analyzed my last 12 mortgage statements and noticed that the minimum escrow balance was basically equal to a full mortgage payment.
Yet again, I was providing an interest free loan, this time to a bank. I decided that I was done giving away interest free loans.
I called up the bank and asked them if they could close the escrow and allow me to pay the tax and insurance amounts directly. After a 2-minute hold, my request was approved! I estimate that after investing the amount previously held in escrow and receiving credit card rewards for paying my insurance bill directly that I will earn an extra $205 annually.
Winning Move Series
This article is part of a series of posts about the actions I have taken to save or earn more money. After adding in these moves, the annual wins total $1,862. Not bad considering I did not have to make any sacrifices for these savings.
Previous Winning Moves
If you update your W4 or rid yourself of escrow as a result of reading this article, please let me know in the comments below. Knowing that I’m helping others earn or save a few extra bucks keeps the stoke around here alive.