Finish this sentence: “If I had a bigger paycheck/big payout I would… ”
(pause and think about your answer)
This year, most people will see a bump in their paychecks due to the changes in tax laws. In addition to a paycheck increase, over half of Americans will get a tax refund.
According to Credit Karma Tax Survey of 2,000 participants, the top 10 things people will spend their refund on are as follows:
10. Buy a gift for that significant other, 2%
9. Give it to a family member, 3%
8. Pay off Medical Debt, 3%
7. Pay off Student Loan, 6%
6. Buy Myself a Gift, 6%
5. Put towards a Major Purchase, 10%
4. Buy a Vacation or Wedding, 11%
3. Pay off Other Debt, 16%
2. Pay off Credit Card Debt, 16%
1. Buy a Rainy Day Fund, 20%
Two-thirds of those surveyed will either be paying off some kind of debt or saving it. Pretty impressive! Spending a refund on a vacation, themselves or their loved ones, is not a mistake necessarily.
Food for Thought
Refunds are not and should not be considered “found money”. Tax refunds are made up of your hard earned money, that you worked for (think paycheck).
Refunds are really you paying the government extra paycheck money on top of the taxes already taken out. The government is of course, all too happy to have the extra pay and invest it to leverage compound interest. (Compound interest that you will never see because the sharing only goes one way).
One way to keep more of your paycheck is to take a look at the newly updated W-4 form and withholding calculator on the IRS website, due to be made available at the end of February 2018. Calculate your “pay increase”. Here are some suggestions for handling the extra money.
Got Pay Increase?
According to ADP, single filers grossing between $46,000 and $162,000 will see an increase between $40 and $190 per paycheck. Married filers grossing between $51,000 and $167,000 will see an increase between $30 and $172. This is before you even adjusted your paycheck withholding.
Between the tax adjusted pay increase and adjusting your tax withholding, you should see a nice overall increase in pay. All pay increases should be treated the same.
1. Pay off credit card, auto loan, medical debts.
Make a list of all debts. (include the following information for each debt: monthly payment, interest paid, pay off amount, name and type of debt). Check out: 3 Ways to Pay off Debt.
2. Build up a Rainy Day fund.
The amount of a rainy day fund depends on many things, most importantly how quickly you can find another job with the same or better pay. Other factors include: how much are monthly expenses, if you have kids, rent/own your home and your level of comfort with risk. Rainy day funds can be anywhere from 3-9 months of expenses (not pay).
3. Invest the extra income.
In order of importance:
1. Max out your 401k (or at least grab the company match).
2. Max out your Roth IRA (the younger you are the better).
3. Max out your HSA account (triple the tax free fun).
Got all that under control?
4. Invest in mutual funds, rental property or whatever your interested in that can generate passive income.
At the end of the day, its not having a bigger paycheck that will make you financially independent, its what you do with what you have.
Change your money mindset. Today, you have more. What are you going to choose to do with it?
Grab Your Slice,