Friday Financial Tidbit-Your 2% raise is here for two more months!

Back in May I wrote about how every worker this year received what amounted to a 2% raise whether they knew it or not. The “raise” was really just a 2% reduction in employee paid social security tax in 2011 from 6.2% of income to 4.2% of income. It was scheduled to end in 2012 but as of today* it has been extended into the first two months of 2012. We all hate to think about the possibilities of tax increases, but being prepared in case of one is an important part of handling your money better.

Hopefully you are budgeting for the increase already, but if not, here are some things I would recommended that you do to plan for it. Do not wait until March or whenever it goes back to 6.2% to feel the pain of the increase. Instead, in the month of January know how much 2% of your gross income is. For example, if you make $4,000 gross a month, you would normally have $248 withheld from your pay check (6.2% X $4,000). Because of the tax break you now only have $168 taken out (4.2% X $4000). So put $80 as a line item in your budget that reads “Social Security increase.” Then use that extra $80 to do something with your money such as pay down on debt, save for emergencies, or put into long term retirement savings. Now when March rolls around, that $80 should not throw your budget out of whack because you already budgeted for the tax increase, so to speak.

Yes, we all hate tax increases and who knows if this temporary reduction in social security tax will be extended or permanent. But this is just another reminder that Washington won’t change your finances. So either way, be prepared and do something productive with your extra money instead of being caught off guard in March and having to scramble to balance your budget.

* Congress can always change their mind at any moment so stay tuned!

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