Make Money with Your Money

Tax season is upon us. For some it's a time of dread and panic, scrounging for the up to date paperwork and frantically scribbling calculations at the last minute, praying that all the numbers add up. For other's tax time is the one time of the year where it feels like free money is falling from the sky.

With a job that allows me a little bit of spare computer time and an early W-2 form, I had my taxes prepared and filed on the first day that I was allowed to submit them with a nice little return check deposited into my account within two weeks.

I was ecstatic when I found out that I would be getting almost $600 back from the government, I'm a college student so I don't make much.

Like a lot of other people, the majority of that money had already been earmarked and spent before it ever arrived. I had a car to license, dogs that needed shots, and a bit of leftover credit card debt from the holiday season to pay off.

As my meager paychecks have begun again for the New Year, my enthusiasm has waned as I've watched large chunks of my income disappear back into Uncle Sam's coffers, not to be released back to me for another 12 months.

Looking over my last check and seeing that over $60, $61.22 to be exact has gone into the great unknown sparked an idea in my head. Why not earn money with my money? Sounds strange right?

Try to think of it like this. Basically all of my working life I have been giving the U.S. government an interest free loan ever year. And it's not just me that's doing it. You are too! What a world it would be if banks and credit unions handed out interest free loans to everyone.

They don't, and here's one sentence that sums up why. There's big money in interest!

If the big lenders don't do it, then why should you?

No good reason yet? I don't have one either.

So what good reason is there to be paying extra money from each check and then waiting and entire year just to get it back? Seems a little silly when I put it that way doesn't it?

I might not know you, but I do know me, and I know that as much as I would like to have more of my money that I earned on each paycheck, I also know that having a large lump sum of money handed to me every February sure is nice. I also know that I'm not the disciplined type. It's easy enough to say that I would take the extra money and put it to good use, but the truth is, I'm sure I'd find ways to piss away each and every extra cent on each check.

With this in mind I've begun formulating a plot. No longer will Uncle Sam get an interest free loan from me! Instead I'll be putting my extra money to work making more money.

For the next page or so try to stay with me, it might get a little math heavy, but if you stick it out with me, I promise at the end I will clear it all up and get you pointed in the right direction to start making money on your money.

The first thing you need to do is decide what you are planning to do with the money you'll be simultaneously saving and earning. Is it ultimately going to end up as retirement cash? The money you'll use to fund your endless summer on a distant beach sipping tropical drinks? If you and your money are in it for the long haul then an employer based IRA account will probably be the place you want to sock your extra scratch, especially if your employer offers a contribution matching program. There are a multitude of websites out there, such as The Motley Fool (fool.com), which offer IRA advice.

For the purposes of this article though, let's assume that you're like me and you would like to be able to access your money within the next five years or so. In that case an online high yield savings account is just what the doctor ordered. I say online rather than through a physical bank because of the convenience of transferring funds, and the higher interest rate, often between 4% and 5%, they offer in order to lure in more business.

A few good places to start your research for the perfect financial institution are ING Direct or WaMu. No matter which online banker you decided to go with, make sure that you read all of the fine print. Ideally you want a high interest rate, free online account transfers, zero fees and no minimums since you'll be chunking away a little bit bi-weekly or each month. One other thing you may want to consider inquiring about is whether or not there will be penalties associated with withdrawing money from the account before the allotted time, five years generally, is up.

After figuring out where you want your money to live, the next step is to recalculate your federal withholdings. In order to do this you'll need to head over to the IRS's website, irs.gov, and find their 2008 withholdings calculator. To use the calculator you'll need your most recent pay stub and your tax return from the previous year.

After determining your withholdings for next year it's a simple matter of filling out a new W-4 form at your place of employment and waiting for it to take effect.

Next comes the tricky part that will require a little discipline and basic math skills, (or at least a decent calculator). You first will need to determine the percentage of your paycheck that is going to federal taxes. To do this look at your most recent pay stub and take the amount of federal income tax from this period and divide it by your gross pay. For example, on my check I had $61.22 go to federal income tax and a gross pay of $627.00. The math would look like this:

61.22/627.00= .09763 or roughly 9.8% of my money went to federal income tax. This number will vary slightly from month to month based on earnings, but it gives you a starting point.

Write this number down somewhere and hang on it to it. You'll have to wait until you get a check with your new withholdings in place to figure out the next piece of math. For the purposes of this article we'll use hypothetical numbers. Keep in mind that this is not exact science as I am not an accountant or an expert in the money field.

Say on your new check you do the math and find that now instead of 9.8% going to the government, only 6.8% is. Take 9.8% and subtract 6.8% from it, this gives you 3%; we'll call this your difference percentage. This is the amount you will be putting into your savings account every time you are paid. In theory you won't miss the money since you wouldn't have normally been getting it anyway until the end of the year.

Now here's the discipline part we talked about earlier. Each time you are paid multiply your gross pay by your difference percentage. Then simply use your online transfer option from your savings account to transfer that amount into your account. So for me the math would look like this:

627.00 * .03= 18.81.

I know it doesn't sound like much, but not very much can add up over time through the magic of compound interest! If you want to see how much your money will be worth down the road after routine deposits and earned interest simply search for a compound interest calculator on google.com. We'll use my numbers as an example.

18.81*2 checks per month=$37.62 per month

37.62* 12 months=$451.44 per year

451.44*5% interest=$22.57 interest earned per year

$451.44*22.57=$474.01Total

Assuming you kept up at this rate; reinvesting your money each year for five years you would end up at the end with $3195.38! Compare this to $2257.20 if you just received a tax return each year. That's a difference of over $900 in five years for doing nothing!

It might not sound like a lot in the short run, but imagine if you kept up at this pace. After 10 years of this you'd have $6697.42, and after 20 years $16,871.46!

Imagine if you put then put this money elsewhere? Like an index fund that averages 9-11% per year? It's easy to see how little bits of interest can add up over the long haul.

I know it may not seem as glamorous or exciting as using your tax return for a new flat screen TV, or a down payment on a new car, but the prospect of free money seems pretty exciting to me. Just keep in mind, the sooner you act, the sooner you can get down to making money from your money.