How Should You Spend Your Pay Raise This Year?

What are you going to do with your raise this year?  “Raise?  I didn’t get a raise,” you say.  You probably did if you receive a paycheck. You’re getting 2% more with every check in 2011 than you did the last check of 2010.

The pay raise isn’t from your employer, but from the government.  Late last year tax relief legislation was signed, and part of it slashed Social Security taxes from 6.2% to 4.2% on wages and salaries workers earn in 2011.  It’s just for one year.  The goal is to give people more money to go out and spend, and that would stimulate the economy.

Two percent?  How much is that?  Well, if you make $60,000 a year, that’s about $1,200 for the year, or around $100 extra a month, before taxes. Before you go on that shopping spree, many financial advisors recommend saving the money.   I interviewed CPA Steve Milam on our 4 o’clock newscast today.  He suggested doing these four things with the money :

  1. Create an emergency fund. Milam says everyone needs 3-6 months of their take home pay as a rainy day fund.
  2. Defeat your debt. Who doesn’t have debt?  He suggests making more than just the minimum payments on our credit card bills.
  3. Save for future needs.  IRAs and 401Ks here.  We’ll thank ourselves later for this.
  4. Spur the economy smartly. Once you’ve done a little on the first three, Milam says go ahead and buy things that enhance your life.

On second thought, maybe you shouldn’t consider it a pay raise.  If you do, then next year at this time, when our paychecks are 2% less, that would be considered a pay cut.

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