5. Increasing Your Cash Flow
Disclaimer: We apologize in advance for any grammatical and spelling errors in the slides.
About this module
In this module, I’m going to review a simple strategy you can implement to increase your net take home pay assuming you’re working a traditional job. This strategy is specifically for traditional W-2 employees that have taxes withheld on their paycheck. If you’re self-employed or a 1099 independent contractor then this strategy will not apply to you.
- Big refund big tax bill
- W-4 Form explained
- Why people overpay in taxes
- Allowance vs exemptions
- How to update your W-4 Form
- Projecting your Cash Flow Increase
- IRS withholding calculator
Resources
- ADP Payroll Calculator
- How to fill out your 2020 W4 Form
- IRS W-4 Form
- IRS Withholding Calculator
- Big refund Big Tax Bill (Updated)
Full Video Transcript
Hello and welcome to this module, increasing your cash flow. So at this point, we have covered a lot of ground in terms of our cash, how to manage it, how to track it, how to be a better steward of everything. You have all the systems in place, processes in place to be able to really maximize what you have. So before I even get into how to increase your cash flow, if you have not completed the first four modules set everything up with your cash flow, do not watch this video on what to deposit, stop it, and then go and watch the other videos. Because what this is going to do is enhance what you’ve already done up to this point. Okay? So here is what we’re going to cover. So the first thing I’m going to break down is big refund, big tax bill. So this, this is going to be really, really important because this is what the IRS says.
And then also what I want to talk about with this particular module in general is this is more so for everyone who works a traditional 9 to 5, a W2 job, if you have any type of W2 income or your spouse has an income or you work or none to buy, this is going to be extremely important to you. Then what I want to break down is the W4 form explained. So that way you understand how this works and what this is, I’m going to get into why people over pay in taxes in really with that overpayment in taxes, what you can do to stop that I’m going to break down allowances versus exemption. So you understand it. Then I’m going to break down how to update your, your W4 form. I’m going to give you some resources on, in some videos on how you can update your W4, how you can make sure you use the IRS withholding these calculator at the end, at the end, I’m going to show it up.
You’re projecting your increase once you do this. So what I’m going to do first off, it started off with this particular slide, big refund, big tax bill. Now this is a little old, but this is a letter from the IRS, basically asking a question, big refund or a big tax bill, which one are you now? What this, what this publication was saying? It’s it’s um, it was basically saying that in the year of 2005, um, Americans overpaid by $215 billion in taxes and a 101 million tax payers got refunds or 80%. And the average refund was $2,100. And what the IRS is saying, and this has been updated, but I’m just giving you this publication. But what the IRS is saying is where does this refund come from? Well, it comes from your actual wallet, your purse, it, it has to do with what you tell your employer and how much to have them withhold, on your paycheck.
And on average, people are having more money withheld than needed. And then they’re also going on to say is you might be using the extra withholding as a forced savings method, but uncle Sam, i.e. the IRS doesn’t pay interest on refunds, except in special circumstances, which there’s typically no special circumstances. So putting the money in any type of savings account or paying down debt, may be a better option. So the IRS is literally telling you, Hey, if you’re getting a refund, you might wanna stop doing that and put this money in your savings account and, or pay down your debt. So you have, you’re watching this at the end of cashflow week because I was talking about a cashflow and how to make sure you maximize it so you can maintain credit. But this is an extra step that you can take to ensure that you’re not overpaying the taxes.
So this is what the IRS is saying. Don’t overpay because if you do, we’ll take your money happily. Thank you for loaning us. But we’re not going to give you any interest on this money. Now, what is the W4 form? Right? So this is a really good question. So the W4 form is something that you’re given every time you start working at your, at your job and the W4 form really means employees withholding allowance certificate, right? That’s what the W4 form means. So I, um, have the purpose pulled up here. And when you look at your W4 form, and this is what it actually says on the most recent W4 form, it says complete form W4, so that your employer can withhold the correct federal income tax from your pay. If too little is withheld, you would generally owe tax at the end, when you file your tax return, and you may owe a penalty if too much is withheld, you may generally get a refund completed form W4, when your changes, when your, when changes to your personal financial situation would change, um, the entries on the form for more information on the withholding, you must furnish your new form W4.
So what did they basically say? They’re saying, Hey, when you’re in, when your personal or financial situation changes, you, you may want to fill out a new W4 form. And this is so important because have you been working on your job for a while and you have not completed your updated W4 form. I’m pretty sure something has changed in your particular financial situation, which means you may be having too much or too little taxes being withheld, typically too much taxes being withheld from your paycheck. So you want to ensure that you fill this out correctly. Now, this is just an example that I have right here. Let’s just say it’s a typical family example, married, working couple. They have two children and their combined income is $80,000. Okay. And let’s just say they have childcare expenses of $3,000. Uh, the typical mistake most people make when filling out the W4 form is only claiming themselves and children as allowances on their W4.
However, because you know, 2 adults plus 2 children is 4, but there’s a big difference between allowances and exemption. So your allowances are on your W4 in the exemptions are actually on your 1040. So when you look at your individual tax return, you have exemptions there. And when you really zone in on what an exemption is, an exemption can be yourself. It can be your spouse, your, your children, or your dependents. So these are allowances. These are the three areas for allowances. So if you’re looking at your, your tax return, your 1040, then yeah, you would have four, but that has nothing to do with your W4 form. So it’s really, really important that you don’t get those mixed up and you understand how this process works. So that way, the goal really honestly, is to not overpay. And it’s not the underpay it’s to break even. You don’t want to be getting a refund back from the IRS. Now, there are strategic things that you can do to ensure that you promote where your taxable income. So even if you increase the amount of you decrease the amount of taxes being withheld from your paycheck, so that we can get increased net income or net income, net, net cashflow, there’s still strategic things you can do to ensure that you don’t get a, uh, a penalty for, so you don’t owe at the end of the year is what I want to say. So how do you fill out a W4 form? So I’ve taken the liberty of going to YouTube and finding a really, really powerful video. So right below this, this particular module, there’s a video on how to fill out your W4 form for the year 2020 step-by-step with instructions.
I’ve also included a W4 form below this module as well. So in case you need to update yours, you have the ability to do that. Um, and also there is an IRS withholdings calculator as well for you to use. So in case you need to go into that IRS calculator, you can do that, but the video that I’ve included, walked you through step by step, exactly how to make sure this is filled out correctly. Now, once you have filled out your W4 form and you’ve updated it, you want to turn this into your HR department. So that way you can get that additional increase in your cashflow. And then typically it takes about two to four weeks depending upon your employer to see that increase. So take advantage of these resources, make sure your W4 form is filled out correctly, especially if you have not done this before.
And especially if you’re getting a refund back again, my goal here is now that we’re at the end of this is we want to maximize all of our dollars available, maximize cashflow maximize credit. So we’re not maximizing our cashflow. Number one, if we’re, if we’re not clear about how to manage it, which at this point, you’re very, very clear on how to manage it. You have some really, really awesome systems in place, but now what I’m saying is, Hey, look, how can we get an additional cash? So that way we can put that money towards our future buckets, right? That’s really, that’s really what we want to be doing here. We want to be either putting this money towards a future bucket and, or putting this money towards paying down a credit card or paying down debt. My suggestion, put it towards the future bucket because you wasn’t, you weren’t, you weren’t used to this money anyways.
So at the end of this, now you understand how all the, how all the buckets work. You have your things set up. So just take this additional cash and put it towards your future bucket. Now projecting your increase. So this is a real, so what I just gave you was a really, really detailed way to set up your W4 and make sure your increases is, is taken care of, but there’s also another way that you can do. And it’s the ADP payroll calculator. And what I’m going to do was get out of this slide presentation. I’ve included this payroll calculator as well for your, for your review, but you literally can just click on this link. And if you are a W2 employee, you can fill this out to see what your increase would be if you were to make these adjustments.
Even if you, if you just wanted to see how much money could up, initially we get, so what you want to do is this project, when you’re going to get paid, you would select your state. Okay. And then once you selected your state, you would add your pay rate. So you would, um, amount, number one is your hourly rate. So let’s say you’re making $50 an hour, and let’s just say, you’re paid by weekly and you work 40 hours a week. So that will be 80 hours. Okay. So that will be a bi-weekly paycheck of $4,000. And then down here, you can see that you have the ability to enter in the allowances, but I’m just going to keep this extremely simple. Let’s just assume that you didn’t, you didn’t know anything about this. You just had your stuff set at zero or set at one.
So then we’re going to keep it at zero. And we’re going to keep your state exemptions at, um, no, you don’t have any, we’re going to keep your personal. And I was just at zero again, and let’s just say, you’re single. Okay, we’re going to calculate this. And we can see that, um, this is the amount of taxes that’s withheld. So our, our net pay will be $2,700 in this example, without any other contributions anywhere. So if we just simply just come over here and change our allowances, once we’ve correctly, understand what our allowances is, but let’s just say we change our allowances from zero to five, and then we change our state. We just keep our, our personal allowances at one. And then we calculate again. You can see that I can get an increase really easily of $200 with that small little deal.
And I don’t know about you, but $200 times two that’s 400 additional dollars that I would have now to use towards whatever I wanted to do, but let’s just say I wanted to take a step further and I want to put it at nine that’s the most I can have it at. And that will be the least amount of taxes being withheld. So again, I’m not giving you any advice. I’m just showing you how this works. You calculate that. Now you can see that that’s a significant increase in money that you will be getting in your net pay. I think that’s almost 300, $400. Um, it was at 2,700. Now it’s at 31.28. So I’m gonna put that right there, 31.28 right here. And I’m gonna look at the other one 31.28. And then if we had it at zero and calculate right here, that’s 27.89 minus 27.89.
So that’s $339 times two that’s $678 additional per month that you would, you would potentially have. If you were to make this adjustment. Now, one of the things you could do is if you want it, you can say, Hey, look, I want to have my allowance. You set at zero for the first six months of the year, and then we’ll have it set at night for the first, for the next six months of the year. So what does that mean? That means you’re going to, you’re going to pay, you’re going to overpay for the first year, and then you’re gonna under, and then you’re gonna not pay anything. So you will easily break even, right? So that’s, that’s a really good example if you want them to do it that way, or if you just want to be specific, watch the previous video in that slide, and then we’ll go into, but I’m just showing you this as a bonus tip to use, to increase your cashflow. Okay. So I hope this helps take action and I will see you in the next module.