For many Americans, a big fat tax refund is something to celebrate, but this annual windfall indicates you were too generous with Uncle Sam. You only get this IOU if you allow your employer to take too much tax off your earnings throughout the year.

Why does that matter? Adjusting your tax withholdings so that you arrive at $0 can help revive your finances throughout the year.

Here’s why you’ll want to revisit your W-4s soon.

1. A Refund is a Free Loan You Give to the Government

When was the last time you were able to borrow money for free? Some auto loans offer 0% financing, but these unicorn loans are unusual. Most legitimate online loans and lines of credit come with rates and fees. This way, a financial institution makes some money when lending.

If you withhold too much tax, you’re essentially giving the government an interest-free personal loan.  When you have to pay fees on every loan you borrow, it doesn’t seem fair that the government gets your surplus tax money with no added charges or fees.

2. A Refund Shaves Off Dollars from Each Paycheck

The first and most immediate consequence of withholding too much tax is what it does to your paycheck. Your take-home pay will be lower than if you adjusted your withholdings properly. By adjusting your withholding, you can deposit more of your earnings with each paycheck.

3. It’s Easier to Balance Your Monthly Budget

Balancing your household budget has been difficult as high inflation keeps increasing the prices of everyday goods. Now’s an especially bad time for your paycheck to shrink. You need to maximize as much as possible so you have your full take-home pay to spend each month.

Once you start withholding the right amount, you’ll have more money for groceries, household goods, and miscellaneous spending.

4. You Can Contribute to Your Emergency Fund Each Month

With more money coming into your hands each month, you can finally start building an emergency fund. These savings do best with consistent, recurring contributions rather than a lump-sum deposit that you could make with a refund.

 

For one thing, your savings will have more time to accrue interest when you start depositing earlier in the year. To maximize how much your fund earns, you can place it in a high-yield savings account.

 

For another, you’ll have savings earlier. This can come in handy if you have to deal with something unexpected before your refund arrives.

 

Of course, even with savings, unexpected expenses and repairs can be challenging. If you don’t have room on your credit card, you can find legitimate loans online for help.

 

If you need help defining legit online loans, it’s simple. Legitimate loans come from licensed and registered financial institutions that offer legal loans in your state. They should never demand payments upfront or guarantee approval without first assessing your finances.

5. You Can Afford to Be Spontaneous

A little extra spending money on each paycheck can change the way you approach life. You might be able to afford spontaneous purchases and financial decisions that you would normally have to wait until you receive your return to make.

Bottom Line:

If you like the idea of having more money on each paycheck, talk to an accountant. They can help you fill out your W-4 so you don’t withhold too much or too little.