Has your paycheck just jumped in size?
If so, congratulations on being among the roughly four in five workers whose net pay has risen — due to a reduction in the amount withheld under the terms of the Tax and Jobs Act.
Unless you also got a bona fide pay raise coinciding with the start of the year, the fatter paycheck is only temporary — the tax cuts begin expiring in 2025.
So if you make a habit out of spending the additional money, that will result in feeling like you’re getting a pay cut by the time the tax cuts go away. Even if you also receive actual increases in compensation, they won’t offset the elimination of the tax cuts.
Spare yourself that agony by not getting into the mindset that you have extra cash in the first place. Here are strategies for putting the temporary windfall to good use.
Pay Down More Debt
With interest rates steadily rising since 2015, it behooves you to allocate any increase in pay toward more generous payments of outstanding balances on credit cards and loans — actually, you should make it a priority.
If your debt includes a mortgage or student loans, the inability to deduct the interest provides another incentive — or at least a good reason why you don’t want to carry a larger balance indefinitely.
Calculate the exact difference in your net pay and add that amount to your monthly payments to creditors — then pat yourself on the back when your indebtedness shrinks faster.
Floor It on the Retirement Plan Contributions
Once your debt is all paid off, you can focus on allocating more money toward retirement or other savings. Even if you already contribute the annual maximum to a retirement plan, you don’t have to spread out your contributions over the course of a full calendar year.
Plan administrators don’t tell you this secret, but you can hack the contribution percentage so that your money goes into the market faster so you can enjoy the upside sooner.
Increase your contribution percentage to the highest amount you can afford, and once you reach the maximum for the year your plan automates things so that you go back to receiving your full paycheck. The maximum contribution amount for 2018 is $18,500, including the maximum of $5,500 you can put into a Roth IRA.
Step Up the 529 Contributions
If you have kids, grandchildren, nieces or nephews who are younger than college age, set up a 529 savings plans for their tuition if you haven’t done so already. If you already have one going, increase your contributions to the tune of the added net pay you are receiving.
Start a Money Challenge
If you’re already flooring it on the retirement plan and tuition savings, you could allocate your windfall toward a money challenge.
By turning savings into a game, you can overcome a common hurdle: Savings goes from something dull yet overwhelming to being something fun. You can even do a money challenge as a group, where participants all support one another in meeting a goal — and the fact that you’d be doing this with tax cut proceeds might put everyone on an even playing field.
Fix Up Your Home
You might see softening demand for various types of home improvments might cause prices to go down on everything you might buy to improve your home.
That’s because the home sales are expected to slow down due to the elimination of two tax deductions homeowners used to enjoy — local property taxes are not deductible from federal income taxes, and mortgage interest payments are also not deductible.
If your motive for fixing up your home is more about feeling more comfortable living there than about trying to sell the place, that might take the pressure out of things so you can focus on doing a quality job.
That Bigger Paycheck Is Temporary
It’s understandable to want to spend the additional money that you will see in your paycheck but if you get used to spending it, you’ll have to get used to another hard truth later on when the tax cut expires. If you can trick yourself into not acting like you got a raise, you’ll come out ahead.
Readers, what kind of a windfall, if any, have you noticed in your latest paycheck? What do you plan to do with the extra funds?