Wednesday, October 1, 2008
Tis Better to Owe than to Receive
When the gentleman sitting next to me found out I majored in International Economics-he asked what I thought of the current state of wall street. I have many an opinion of the bail out- but my specialty is practical day to day econ. How economics affects the little decisions you make every day- ie cost per wear.
He wasn't familiar with the concept of time value of money - a dollar today is worth more than a dollar tomorrow. A dollar today is worth a great deal more than a dollar a year from now. And this is where I was able to give him one piece of solid financial advice.
In tax season it is better to owe the government than to be owed. If you receive a tax refund- you lost, the more you owe, the more you win. Most Americans don't think that way.
Let me explain: If you get back from the government $1,000- then the government borrowed $1,000 from you for a year with out paying you any interest. If you owe the government $1,000 then you borrowed $1,000 from the government for a year with out having to pay any interest. If you took that $1,000 and put it in the bank and saved it because you knew you were going to use it to pay taxes, and got paid 3% interest for the year, then in the end you made $30.
Not only that it is better for you to have that $1,000 today rather than in April because that $1,000 is worth a lot more today.
This requires you to have some self control and methodically put aside money each month for taxes, but it is much better for you to be getting paid interest on your money than the government. It is better for you to have your money today, than tomorrow. Go maximize your exemptions, and if you get money back from the government in April, instead of thinking you won, realize- you lost.