Stop Giving Interest Free Loans

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.

Stop Giving Interest Fee Loans
Stop Giving Interest Fee Loans

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.

Stop Giving Interest Fee 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

Winning Move #1 $356 additional interest earned
Winning Move #2 $787 saved on auto and home insurance

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.

18 thoughts on “Stop Giving Interest Free Loans”

  1. Great Post Jason! You’re absolutely right. I actually don’t mind paying the government in April. If you’re already saving a good amount monthly its no big deal to have one larger expense. In return, as you pointed out, I get to invest early and often. One tip for your single readers, putting a “2” on your W4 form is actually closer to your real tax liability after IRAs, personal exemption, and standard deduction.

    Great series! Looking forward to learning more from you :).

    1. Thanks for the tip! I’ve been itemizing for a few years now and did not know that a 2 would be appropriate for those taking the SD.

  2. Interesting article that, I agree, many people probably have not realized. My first concern is with the 2nd half of the post, regarding closing the escrow account. You make it sound very easy and simple. My concern is that not all mortgage companies will allow the escrow account to be closed. It’s in the bank’s interest to make sure the taxes and home insurance are current and paid. That’s why they’ve setup the escrow account in the first place.

    My second concern is of greater significance. I feel you should have put more emphasis on the fact that once the escrow account is closed, the burden of paying these fees (taxes and insurance) are now on the individual. So it’s not that the individual has more money in their pocket to spend. The individual still needs to save money, or in some way be prepared, when it’s time to pay taxes and/ or insurance. So that’s another bill of approximately $1200 each year for insurance and an extra quarterly payment of whatever your tax bill is. I think you put it a little too simply as close your escrow and invest that money instead. You still need to be prepared to pay those bills which for most, will require saving to ensure you can afford it. And as we know, saving is not a strong point for most people. The escrow account helps/ mandates they save for the necessary and important payments. If everyone was able to save easily and willfully, we’d have a lot less personal debt in the country.

    1. You make some good points here. The bank may not let you remove escrow. They did for me though. Yes, you still need to pay the taxes an insurance on your own. If a person can’t manage their cash flow to do this, they should not remove the escrow.

      The true value in this move is not just the timing of the payments. The bank keeps more escrow than is necessary to pay your bills. According to this post, they keep two months of escrow payments as a minimum balance. When you get that money back, it is as simple as investing it as you wont need it. The remaining amount you get back you will need to pay your taxes and insurance.

      The premise of this post is an action that I have taken to earn a little extra money. What’s right for me, may or may not be right for you.

      I agree that if everybody was able to save easily, we would have less personal debt in this country. Here at Winning Personal Finance, we don’t want to be like everybody else. This blog is about optimizing your finances so that you have more money and more options. Removing mortgage escrow is probably not worth it to most people. I’m willing to do it to keep inching towards my goals. Remember that if I earn $205 extra this year on that money, my savings will compound each year. This means my investment returns will grow their own investment returns next year. Hopefully those returns add up to a pretty significant amount ~30 years from now when my mortgage is paid off.

  3. Hmm, maybe I’m missing something, but what’s the problem with the interest-free loan? Just on principle? I always claim 0 so I get my money back in the end.

    How much extra are you getting in your paychecks, and how much are you earning on those contributions?

    Not being flippant, but I honestly have never understood the ‘interest-free loan’ argument.

    1. This is a simple time is money situation. Yes, you will get your money back by claiming 0. But if you are claiming 0 when you should be claiming more, you are giving an interest free loan. By giving an interest free loan, you are passing on the opportunity to invest or spend the money sooner. If you normally end up with a small tax refund, than it’s not really a big deal. For me, adding two children and buying a home with a mortgage since last updating my W4 drastically changes my tax bill. I am expecting a refund of over $8K this year. I estimated earning ~8% on those savings. The quicker I can have that money in my pocket, the higher my expected return is for investing it.

  4. This is a great list! While I no longer own a house (I travel full-time in an RV), escrow is definitely something to think about. Paying it yourself sounds interesting, plus you can eliminate any mistakes that the mortgage company may make with it.

    1. Michelle – I’m a little star struck right now. Thanks for your kind words, for showing us how it’s possible to make $1M blogging and for checking out my site!

    1. Sometimes people make irrational decisions. On a small amount, it does not matter much. If the amount is material, the missed opportunity may be expensive.

  5. We also withhold just enough that we owe a little or receive a small refund at the end of the year, and have been doing it for years. I’m not sure where the practice usually starts for people when they have a lot withheld during the year in order to get a large refund later. If the reason you have it withheld is simply because you’re afraid you’ll spend it, you lose the gift of compounding you’d receive if you’d just put that money to work instead. Over a year it may not seem like much, but over the years it adds up. So yeah — you’re giving the government an interest-free loan during that time, year over year. So Uncle S issues your refund with a “Thank you very much, good citizen!”

    1. Thanks for stopping by Rybo. I ended up giving the interest free loans when our tax situation. I never updated my forms to reflect the changes. Laziness has a cost.

  6. I overheard someone in the office this morning talking about how they like to set their W4 to zero to maximize the tax refunds. It took all I had not to jump in on the conversation!

    At my work there’s a website where you can change your W4 exemptions any time, along with direct deposits. I probably have messed with it a little more than I should the past month or so. But I want my money now!

    1. Without the discipline to save the little bits of extra money, the big tax return becomes forced savings. That said, it’s so inefficient.

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