Friday, March 16, 2007

Free money, anyone?

This time of year, everyone is doing their taxes and hoping for a big refund. I can associate with this feeling- it is almost like getting free money. And, if by some miracle, you are getting a big refund, sock away the money in a good investment and resolve to never let it happen again!!

Way back in high school, one of my teachers gave the class some savy advice... it is always better to get money sooner and pay it out later. He went on to describe the time value of money and the power of compounding. I don't know how many other students remember that advice, but I've taken it to heart and it has helped me get to financial independence. Over the years, I've discovered that this is free money, done right. I know, FREE MONEY is advertised so frequently today it is almost a flag that says they are trying to rip you off. And yet, there is a way to create free money... Pay as late as possible, without incurring fees and interest, of course.

That gets us back to your tax refund, and several other areas where you may be giving away free money. In getting a tax refund, you are getting back money you paid almost a year sooner than you needed to. You gave your rich uncle a free loan. Resolve to turn the tables on Uncle Sam this year by demanding that he give you a free loan. All you need to do is analyze your tax situation and adjust your W-4 so that next April 15th you'll owe something close to 10% of your annual taxes. Take that extra money every paycheck and put it into your emergency fund, which is presumably earning 5-6% interest. That interest on the difference between your refund and what you would owe is free money.

Amazingly, there are many ways to accomplish similar feats. I've mentioned that I charge essentially everything to my credit cards so I can pay it later and keep my money working as long as possible. I even try to arrange to make big charges the day after the statement closes so I can extend the period before I have to pay it for another 30 days. Need new tires on the car? Wait until the day after the credit card statement closes and you've created free money.

I arrange to delay payment on bills until just before they are due. I use the internet for most payments and transactions and this makes it very easy. When you get the bill, just schedule your payment for a few days before it's due and keep your money in an internet bank or money market account, rather than paying the bill as soon as you get it or whenever it rises to the top of the pile.

I know some who transfer balances to new credit cards with teaser, no interest on transfers. This is another way to create free money. Just make sure you read the fine print. There are numerous articles out there on the fine print, what they mean and how to stay out of trouble with these deals, so I'll leave it that.

Whatever you do, with all these strategies, make sure you are not incurring interest or fees. These will quickly eat up your free money if you are not careful. And, put the money away, don't spend it just because you have it. This is your first step to financial freedom, don't spend it on an upgrade for your daily latte.

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