Now, there’s a juicy topic! In the world of finance liquidity means having money available for your use.
My guess is that you don’t think of yourself as a ‘finance’ person, but you do handle, use, and need money, right? And one of the things you need from money is to be able to get your hands on it, right? If all of your money was tied up in a retirement account, in order to get your hands on it you would have to go through hoops, fill out forms, wait, and then would only be allowed to take out so much without a penalty. You are willing to have the money “out of touch” like that so you can sock it away and hopefully let you money grow for your retirement. That’s a good thing.
However, a bunch of people I know are also reducing their access to their money in another way, and it’s an interesting money knot for sure: They overpay their taxes. One friend does it because he feels that it will make him safer from the possibility of an audit. Others do it because they actually think of their taxes as a savings account. And yet others think of it as a way to put aside money for fun things. Hmm…
Personally my sweet spot with taxes is to either get back or owe both Federal and State less than $1,000. The reason I like that spot is because I’m not in essence lending my money to another ‘entity’ to use all year long. Sure I can’t make as much interest on my money as the government can. They can put my money with your money and invest it at higher rate than you or I can get. But beside that point, I also don’t have the use of my money when it is waiting to become a positive tax return.
Allow me to digress for a moment. I must admit that I do enjoy the guilty pleasure of watching some daytime Judge shows here and there. My favorites are Hot Bench and Judge Milian from the Peoples Court. These things are always about money, because money is the basic way that courts have of solving issues. It’s amazing how many times people end up in court because they borrowed money from someone with the promise of paying it back once they got their tax return—and then somehow didn’t pay it back.
Here we are just after Tax Day, maybe you filed early, maybe you filed on time, maybe you got an extension. The more interesting question is, did you give the government a bunch of your money to use free of charge for months, and at the same time deprive yourself of having the money on hand during the year? Oh, and while we are at it, during the year, did you incur or pay any interest on your credit cards?
If you did, you are certainly not alone, and I get it. Overpaying in taxes to get a bigger return can feel like a good idea. My guess is the part of you that makes the decision isn’t really your competent adult part, but more your kid side that wants to be handed some fun money all at once. There are other ways to create some fun money—really!—and they don’t cost you as much in liquidity or interest.
Whatever happened with your taxes in 2016, you have a choice to do it the same way or differently in 2017. What’s your choice?
Shell Tain, The Untangler
If you’d a bit of extra support untangling this liquidity thing, give me a call at 503-258-1630 or check out my website at www.shelltain.com.