Congress extends payroll tax cut
In an anticipated move, Congress has approved an extension of the 2% Social Security payroll tax cut through 2012. The provision was set to expire at the end of February, but now wage earners and self-employed households will see this tax saving throughout the year. So what should you do with the estimated average $1,000 tax savings per household in 2012? Here are some tips:
| • | Pay down credit card balances. Where else can you receive a 10 to 20% return on your money? This is an easy way to turn your tax savings into interest expense savings as well. |
| • | Pay down student loans. Gone are the days of easy access to low interest student loans. Saving on interest expense north of 6% on your student debt puts that money back into your pocket. |
| • | Build your emergency fund. Experts suggest you have anywhere from 3 to 9 months of liquid monetary reserves in case of financial surprise. Are you properly funded? |
| • | Save for something. Consider saving for your retirement, or a child's college, or a future wedding. Paying for future expenses with your own funds versus taking out loans is like paying yourself the loan interest expense you would have paid the bank. |
| • | Invest in yourself. Investing in yourself often provides the best return money can buy. Perhaps it is a class to build your skills or learn something new. Anything that can make you more desirable to a current or future employer means more money in your pocket throughout your career. |
| • | Consider a balanced approach. Donate some, save some, and spend some on something fun. This way the extra money makes you feel good on multiple levels. |
Getting these extra funds each paycheck can easily get us into the habit of spending more. What will you do when the payroll tax savings turns off at the end of the year? Taking an active approach to this temporary payroll tax “raise” will not only solve this potential future financial hardship, it might just improve your current financial situation as well.