What Are You Doing with Your Payroll Tax Cut?

At the end of last year, Congress hurried through a tax package.

One of the credits that was allowed to expire was the Making Work Pay tax credit.  However, our representatives replaced the Making Work Pay tax credit with a reduction in the payroll tax paid by employees. This means that you should be seeing a paycheck that is a little bit bigger.

Our leaders, of course, want you to go out and spend that money, pumping it back into the economy.  The whole point of tax cuts is to encourage you to spend so that we can keep the economy, which relies a great deal on consumer spending, moving in a direction of positive growth.  However tempting it might be to spend that extra money, though, it is a good idea to consider how that money can help you down the road.

Here are some ideas for the extra money many people are seeing in their paychecks:

Retirement Savings Boost

taxesA few extra dollars a month, compounded over time, can add up to an amount that is nothing to sneeze at.  If you still have room to contribute to tax advantaged retirement accounts, perhaps you should increase your contribution this year.  Since the money is taken from what you pay in Social Security tax, using the money to boost your retirement savings might be a good idea since you never know how solvent Social Security will be when it comes time to retire.

Emergency Fund Boost

Get a little closer to your emergency fund goals.  Depending on your salary, the extra money in your emergency fund could help pay for car repairs, groceries, or other expenses.  It never hurts to have a little extra in your emergency fund; it will prevent you from having to use debt to cover unexpected costs.

Try Out a New Investment

If you are itching to try out a new investment, or if you want to start an income portfolio, this extra money in your paycheck may be just what you need to kickstart your efforts.  You can use the money to try an investment that you have been wanting to try, but didn’t because you couldn’t afford to lose the money.  Or you could begin buying shares in a dividend paying stock (including using a DRIP) to begin developing an income portfolio.

You can also use the money to invest in yourself.  Use the extra money to pay for web hosting, and other costs associated with starting a blog or web site.  You can use the money to build up an online side business that could yield solid returns in the coming years.

Pay Down Debt

One of the best ways to stay broke is to carry debt.  You can put your extra money toward your debt, making an effort to pay it down faster.  If you are making $50,000 a year, you can expect an extra $1,000 in your pocket over the course of the year. That’s not bad when it comes to paying down credit card debt, putting extra toward a car loan, or putting a dent in student loans.  Not only will you reduce your debt, but you will also be paying less in interest.

What do you want to do with the money from your payroll tax cut?

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Published or updated December 8, 2012.

Comments

  1. I want to be a good American and spend it on crap!

  2. I’m spending mine (and more) on the increase in my health insurance premiums.

  3. Love the sentiment Miranda. Sometimes you just can’t save people from themselves. Ha!

  4. Working towards maxing out my 2011 Roth IRA.

  5. I normally would put it into savings or investing! This year, I underestimated my tax liability, so I will use it to pay our taxes.

  6. I blogged about this very thing last week. We are directing it to our IRAs.

  7. I’ll be using it to pay down tax as well. :(
    We are going to owe quite a bit this year.

  8. These are great options but another option could be to invest in gold or silver as both have continued to increase over the past 5 yrs. As currencies are devalued the metals market will continue to increase

  9. I still do not understand how our government thought reducing social security taxes by 2% was a good idea (isn’t SS struggling to begin with?). I sometimes wonder if we are sacrificing our children’s future for a new iPad, or something similarly unnecessary.

    Like many others, however, I am using my ‘windfall’ to reduce my consumer debt; although the difference is so small that I almost did not notice it!

  10. fk you make a good point but think of the bigger picture if tax is reduced then people have more money to put into the economy. This also has the benefit of giving people the chance to make more money therefore help the economy to recover which mean the government will increase ss later on.

  11. test. test. test. test. test.

  12. A reduction in SS just means tax increases elsewhere. Not necessarily at present but in the future at some point… Seems that the emergency fund is the place to deposit in order to cover some future tax liability.

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