Debt management begins with paycheck management

This is an exciting time of the year for many American consumers, as tax time approaches. No, most people are not too excited about filing their income tax return, but most people receive a refund each year, and this year that refund averages out to a little more than $2000. That windfall is usually quickly spent on a new TV or a vacation or as a down payment on a new car. Tax refunds are rarely spent wisely, which is a pity.

The average American household carries nearly $10,000 in credit card debt, and that $2000 or so could go a long way towards paying that debt down. Of course, few people will see it that way, as such a large sum of money just seems better suited towards some large purchase. But what if that $2000 was in your pocket all along? Could you have done something smarter with it?

The tax refund that most people receive each year is just that; a refund. It means that the taxpayer paid more money in taxes than he or she owed, and for the average taxpayer, that means about $170 per month. That money has effectively been lent to the government, interest-free, for a year. With most people heavily in debt, who can really afford to lend the government money at no interest for a year? Couldn't that money be put to better use year-round?

Of course it can. That money can be used each and every month to reduce debt. If consumers would simply adjust their tax withholdings by filing a new form W-4 with their employers, the amount of taxes taken out of their paychecks could be reduced accordingly. That means, on average, an extra $170 per month, every month in the paycheck. And that money would be available to make extra payments on those monthly credit card bills. It's a far cheaper and easier way to reduce debt than to go through some complicated and expensive debt consolidation plan.

The W-4 form allows tax deductions for each dependent child and offers allowances for employees who are married. Each time that status changes, employees should reevaluate their tax payments and fill out a new form accordingly. If you have no idea how much should be withheld from your paycheck, you can go to the Web site of the Internal Revenue Service and try their tax-withholding calculator. There is no reason to lend interest-free money to the IRS when you could be using that money to pay off your bills that are accruing interest at 20%. Use your money wisely.