Today's tip is part of our Fiscal Fitness '09 series. Every weekday this month, you'll get help getting fiscally fit as we work toward our goal of saving $2,000 to invest in 3 stocks!

Every year, about 75% of us overpay our taxes. By quite a lot.

Last year the average tax refund was around $2,400 -- that's an extra $200 a month lining Uncle Sam's pockets until April 15, not yours.

If you cashed in last April (or already know that you're getting a refund this year), then it's time to give yourself a raise starting with your next paycheck.

What's wrong with getting a refund?
We know it's hard to beat the thrill of a windfall, but consider what you're passing up by giving Uncle Sam an interest-free loan.

If the IRS were paying out measly checking-account rates of around 0.5%, you'd be able to pick up the tab for a few espressos -- or $6. Even if you could earn 4% from a high-yield savings account, it'd amount to just $48.

Nonplussed? We hear you. But we're committed to turning noninvestors into shareholders, and we think the following results are pretty convincing. Had you invested that monthly $200 overpayment into stocks earning 10% annually, it would have grown to roughly $2,524 in 12 months. That's a tidy $124 return.

If you're balking at the idea of actually earning a 10% annual return, think longer-term:


10-Year Average Annual Return

Chesapeake Energy (NYSE:CHK)




Biogen Idec (NASDAQ:BIIB)


Titanium Metals (NYSE:TIE)


Public Storage (NYSE:PSA)


AutoZone (NYSE:AZO)




Source: Yahoo! Finance.

And remember, at the end of this month we're giving you three of our advisors' investment ideas. With so many solid companies trading at historic lows, such returns are certainly within reach (though there aren't any guarantees).

Pad your paycheck with an extra $200 a month
Let's get to the details so you can start seeing the fruits of today's Fiscal Fitness '09 tip ASAP.

To complete this task you'll need:

  • Your most recent pay stub and last year's income tax return.
  • A fresh Form W-4 from your employer or the IRS website.

The idea here is to increase the number of exemptions you take while avoiding underpaying. To nail the number use the IRS' withholding calculator. The calculator at can also guide your adjustments. How much is each exemption worth? Well, generalizations and taxes are a potentially lethal cocktail, but if you thrive on rules-of-thumb, figure that each exemption equals about $850 in tax.

To avoid underpayment penalties, shoot for the number of allowances that satisfies 100% to 110% of the prior year's tax payment (not counting your refund). Don't worry about nailing your withholding perfectly. Put a reminder in your date book in June, when you'll have a better handle on how your annual wages and withholdings will shake out.

One more note before you fill out a fresh W-4: This exercise is best for those who do not anticipate any major life/tax changes (e.g. marriage, birth, Lotto payout). So if 2009 looks like it'll be a pretty close repeat of '08, go snag that $200 monthly raise right now.

More ways to save ...

  • Get organized and snag all those deductions/credits you deserve: Everyone gets a standard deduction, but that doesn't mean you should take it. Millions of people give up potential tax savings simply because they don't keep records or take the time to itemize their deductions. Especially for homeowners and those with high medical bills, missing out on itemized deductions is hazardous for your financial health. And if you do go with the standard deduction, don't just assume that you should take it on both your state and federal returns, or you could be leaving money on the table. We outline a simple three-folder tax record-keeping system. What better time to put it in place than now, at the beginning of the year?

Read the latest from Fiscal Fitness '09: 1 Month, 2 Grand, 3 Stocks to get our other money-saving tips. This week, we're warming up your budget by cutting back on everyday expenses. You can also keep up with our daily tips through our daily Foolwatch email or head to the "Fiscal Fitness '09" discussion board.