New Money!
The Budget Doctor’s Advice on Tax Breaks
Paychecks have not been increasing for most folks who are not Wall Street bankers. Other people who currently have jobs are happy just to keep them and don’t expect raises. However, virtually every worker got a 2% raise for 2011. The federal government has changed the payroll deduction for Social Security from 6.2% to 4.2%. That means that a worker earning $50,000 a year just got a raise of $1,000. In addition, just about all the other tax breaks were continued and the ATM (alternative minimum tax) was kept in check for another year. About the only tax increase that occurred was an increase in the estate tax. That means that if you have a sizable estate, 2011 will not be a good year to die. It will however, be a good year to live.
Most Americans will get this nice raise as well as an income tax refund. That means new money. Regular readers know that new money must always be used to increase your net worth and there are only two ways to do this: pay down debt and save.
Of course you get to decide which of these worthwhile paths to follow. If you have an emergency savings account, it may be wise to put all of the new money towards paying down your debt. Every dollar used for this purpose saves a few cents in interest costs and fees so this choice makes the most sense financially. If you have no emergency savings, you will likely sleep better at night if you can put a few hundred dollars in the bank, so saving may be the best choice for those who like to sleep. And for those of you who have trouble making decisions, you might decide to save half of the new money and use half to reduce debt. Those who are good in math might consider a 60-40% split or a 71-29% split or some other arcane formula but math should never get in the way of financial success.
Here are the Budget Doctor’s suggestions for new money:
1. Visit your payroll department.
Don’t let the 2% increase in net pay just disappear. Have it directed to a savings account.
2. Plan for increased debt payments.
If you pay debts via an EFT or automatic payment, increase the amount of your regular payment by the amount of your raise.
3. Plan for your tax refund.
Have your tax refund directly deposited into your savings account instead of your checking account. You can withdraw the amount you want to use for debt payment.
4. Pay down debt strategically.
Always make extra payments on high interest debts like credit cards before making extra payments on lower interest debts like mortgages and government student loans.
5. Resist the urge to splurge.
New money is not extra money and it doesn’t mean a new smart phone or large screen television. Those are things to save for and to budget for. If you must celebrate with a pizza, use a coupon.
6. Think about retirement.
If you have taken care of your debt and your emergency savings, consider contributing to a retirement fund. If you get a match from your employer on your 401k or 403b, you may double your money! Even if you just contribute to an IRA, you’ve taken a giant step.
It appears that the economy is slowly improving and we can hope for bigger raises and better job opportunities soon, but isn’t it refreshing to see even a few extra dollars and to have a chance to get a little wealthier? Just remember to stay alive.