This may be the worst financial advice ever, so consider yourself warned.
I know a financial misfit that can seem to manage his money, no matter how hard he tries. Money seems to burn a hole in his pocket. He has emerged from bankruptcy with a clean slate, does not have any credit or debt, but still doesn’t have any money left over at the end of the month. His savings are zero.
People usually don’t appreciate unsolicited financial advice, but sometimes I offer it anyway. My first suggestion to this misfit was to enroll in a payroll savings plan through work. His employer does not offer it so that idea is off the table.
My second suggestion was to set up a monthly or biweekly debit from his bank account, for a small amount of money, and ask the bank to put it in a mutual fund or savings account. He couldn’t seem to get to the bank to set this up.
So in the end, I suggested something unorthodox. I told him that he can ask his employer to withhold more income tax from his pay, so that he gets a tax refund at the end of the year. That refund should be used to start building savings. Since he doesn’t have any debt, the money should be free and clear, unless he decides to go blow it on something stupid.
This advice flies in the face of many financial experts suggest. Here is a short video of financial guru Suze Orman, talking about tax refunds. To quote Suze,
Now I know all of you are so thrilled, when all of the sudden you get a check in the mail from Uncle Sam, for 2,500 or 3,000 dollars. What are you thinking people? You have just lent Uncle Sam money interest free.
(I think interviewing people at the spa, while they are getting a mani-pedi is also a nice touch. Don’t you?)
Gastric Bypass for Your Wallet?
Anyway, is giving Uncle Sam an interest free loan the worst advice ever? Maybe, but for someone who does not have the discipline to save any other way, it might be his only chance. It’s like a gastric bypass for his finances.
Gastric bypass is a surgical procedure to treat morbid obesity. The surgery makes the stomach smaller and helps food bypass the stomach, making people feel full faster and thus reducing their food consumption. It is an intervention that requires a serious surgery to curb destructive eating behaviour and is often the weight loss plan of last resort. So, maybe an interest free loan to the government is the only way to curb destructive spending behaviour? Maybe, by having his pay check bypass his wallet he can start the savings plan of last resort and reduce his consumption?
Please note that if you are bankrupt or have other serious financial issues such as unpaid taxes, child support, fines etc. having more tax withheld may not help and could make matters worse. In certain circumstances, your tax refund may be seized to settle outstanding balances.