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Fallow Finances

America is no longer an agrarian society, but we're all still in the business of growing. Whether we earn our living on a tractor, at a desk, or in front of a bunch of ungrateful kids, we are responsible for cultivating the financial fruits of our labor, getting it to blossom and reproduce.

But let's face it -- we're not always smart with the tens of thousands of seeds we're given each year. They often languish in infertile accounts or get strewn among the thousands of companies vying for our kernels.

It doesn't have to be that way. Every dollar you earn has the potential to sprout more of the green stuff. Here are some of the ways you can turn your finances from fallow to fecund.

Re-plant wilted investments
You'll soon receive your year-end account statements, which will show the return you earned for 2003. This is an excellent opportunity to evaluate your investment strategy. For the year, Standard & Poor's returned 28.7% and the Wilshire 5000 returned 31.64%. If your equity investments didn't' do as well, perhaps your portfolio is due for a change. The Fool offers stock newsletters that have served up market-beating investment ideas. Or you can start by moving your money into a broad-market index fund -- if you can't beat the market, you might as well match it.

Stop overfertilizing Uncle Sam
Last year, approximately 70% of Americans who filed taxes got money back. The average refund was $1,973 -- an IRS record. While supporting the government is a noble endeavor, it's your money -- and you should get it back ASAP. Furthermore, if your refund is in the thousands of dollars, you should adjust your withholding and thereby increase your take-home pay. Of course, this might mean you won't get a refund next year -- you might even owe taxes, depending on how you re-file your W-4 -- but it'll allow you to use your money now as opposed to waiting until April 2005.

It's the old "time value of money." If you overpaid in taxes last year, you missed out on the opportunity to invest that money earlier -- and you missed out on those double-digit stock returns.

Planting in the right field
If you have assets that are not earmarked for a specific purpose (e.g., emergency fund), are not in a retirement account, and you haven't maxed out your retirement accounts, then you're wasting money in the form of overpaid taxes.

Let's see how this could happen to someone in the 25% tax bracket with access to a 401(k) plan. If that person set aside $2,000 in a regular brokerage account and earned 8% for the year, the account would be worth $2,332 a year later. Unfortunately, if that growth came in the form of short-term capital gains, she'd have to pay $83 in taxes, leaving just $2,249.

However, if she instead put that $2,000 in her 401(k), she'd immediately realize a tax savings of $500 since contributions to qualified retirement accounts reduce taxable income. Plus, the growth is tax-deferred -- i.e., she won't pay taxes on the growth until she withdraws the money in retirement -- so her net at the end of the year is $2,832. And if her employer matches her contributions -- say, 25% of contributions -- then we're looking at almost $3,400.

Admittedly, we made a few assumptions that made this is an extreme example. She will eventually have to pay taxes on that 401(k) money. Most people don't plop down $2,000 at once in their 401(k)s and benefit from a full year's growth. And there are ways to minimize taxes in non-retirement accounts.

But if you have assets that could be shifted to a retirement account, why not take advantage of those tax benefits? Yes, you generally can't touch the money until you turn 59 1/2 without paying a penalty. There are, however, many ways to get the money if you need it (e.g., qualified emergencies and loans to yourself). Assets in IRAs can be used for qualified home purchases and education expenses. And contributions to a Roth IRA can be withdrawn anytime, penalty- and tax-free.

By the way, you also could be paying too much in taxes on college savings that aren't in a Coverdell Education Savings Account, a 529 plan, or a Series EE savings bond. The numbers would look different from the example above since you don't get a deduction (unless you live in a state that allows residents to deduct contributions to the state's 529 plan), but the money grows tax-free. For the details, visit our College Savings Center or check out The Motley Fool's Guide to Paying for School.

Keep your seeds from the birds
The contemporary onslaught of advertising -- commercials, mass mailings, spam, foreheads -- can make a person feel like that woman in Alfred Hitchcock's movie The Birds: You have to flee for your financial life, or nothing will be left but a pile of tattered clothes and some feathers.

The best way to prevent your money from becoming bird poop is to get it to a protected place -- an account that is not easily accessed. This is best done automatically, having a certain amount electronically taken out of your paycheck or transferred from your checking account.

If you participate in your employer's retirement plan, you know how adding a little bit each month can accumulate over the years to thousands of dollars. However, you can have money automatically transferred to savings accounts, dividend reinvestment plans, and savings bond accounts. It takes just a few minutes to set up an account, and you'll get the money out of your hands and away from the circling vultures.

Robert Brokamp is the co-author ofThe Motley Fool Personal Finance Workbookand the author ofThe Motley Fool's Guide to Paying for School.

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