As I mentioned in my recent article covering some of the major tax law changes, we will have a continuation of the making work pay credit, but it will come in the form of a withholding reduction. Payroll tax withholding will drop from 6.2% down to 4.2%. Jason from One Money Design is here with a creative post about what to do with those tax savings.
This year could be a life changing year for many from a financial standpoint. With the current social security tax break (a 2 percentage cut in your portion of the payroll tax); Americans are going to have more money in their paychecks for this year only.
The problem most Americans will encounter is the temptation to spend this extra income. If you don’t manage your money wisely it will quickly become a part of the monthly cash outflow and disappear in the grocery store or at your local restaurant. Rather, don’t look at this tax break as a bonus you can freely spend. It’s a one year opportunity to help achieve some of your most important financial goals.
Here are a few ideas on how to use your tax break wisely:
Some people have found it difficult to give more money because of the recent economic downturn. This has resulted in churches and other ministries suffering and having to make expense cuts. If you’ve had to cut back on your giving now is the time to focus on helping support your local church or other nonprofit organization. Remember, your giving is tax deductible so you’re saving even more.
Create an emergency savings
If your emergency savings account is lacking or has dwindled away, the opportunity for savings is equally as good. Begin saving immediately if you don’t have at least $1000 in your savings account. A $1000 will protect you against most unplanned situations or sudden repairs to your car or house. Obviously, this amount doesn’t do you much good during a job lay off, so you need to commit to saving consistently each month until you have 3 – 6 months put back (according to Dave Ramsey).
Pay off debt
If you’ve been looking for debt help you may have just found your answer. With this additional income you have a great opportunity to knock out that Christmas debt or other debt that’s been lingering around for a while. Absorb this extra money into your debt plan as an extra payment each month. There are plenty of free debt calculators on the Internet that will help you create your debt pay off plan.
Increase investment contributions for retirement
Another great way to use this money is to absorb it into your 401(k) or IRA each month as an extra investment. The great thing about such a move is the fact you won’t see the money in your paycheck, so the temptation isn’t there to find another purpose for it. If you have a 401(k), make sure you’re investing enough to get any employer’s match! Don’t miss out on this free money.
Start saving for your children’s education
Finally, many Americans haven’t been able to start contributing to their children’s future education because debt or too many other goals have gotten in the way. The great thing about saving for your children is that it can change your family tree forever. Wouldn’t it be wonderful for your children to graduate college without debt and immediately start giving, saving and investing more than you ever did? Now is the time to start making that dream happen.
Remember, the Social Security tax break is only in effect for this year. But, I have a feeling, once you start using this money for any of the above goals, you probably will find a way to continue down the same path next year.
If you’re having trouble deciding, pick 2 goals, but don’t try to attempt more than 2 at a time. Doing so will just dilute your efforts. Dave Ramsey’s Baby Steps recommend you tackle the above goals in this order: 1) Giving or Tithing; 2) Saving $1000 for emergencies; 3) Pay off debt; 4) Save 3 – 6 months living expenses; 5) Maximize your retirement investments; 6) Save for the your children’s education.
How do you plan to use your Social Security Tax break this year?
Jason Price is a personal finance writer at One Money Design where the mission is helping people achieve true financial freedom. He writes about practical tips for managing money and Christian personal finance topics. You can also find him on Twitter and Facebook.
(photo by Rego – d4u.hu)