NEW YORK (MainStreet) – The 2010 gift-giving season is over, but a gift for 2011 will start arriving in just a few days – and will keep on coming for 52 weeks. It’s the cutback in Social Security payroll deductions approved as part of the recent tax-cut compromise.
For the coming year, the Social Security withholding will be 4.2% instead of 6.2%. The idea is to give consumers more to spend to stimulate the economy. So, what’s the best thing to do with this little windfall?
Granted, a 2% raise won’t rock anyone’s world. But it’s still something, given that so many people are going without raises. If you earned $1,000 a week, the cutback in Social Security withholdings should increase your take-home by $20.
At this time of year, many people will find the best use of that extra income will be to accelerate payments on the credit card debt run up over the holidays. If your card charges 18%, extra payments to reduce the card balance will “earn” 18%, since they will allow you to avoid interest charges at that rate.
Use the Credit Card Payoff Calculator to figure the benefits. Generally, it makes sense to attack the card balance charging the highest rate first.
Another good use for this Social Security money: boosting long-term savings and investments. As a rule, most people should save around 15% of their gross income, though the figure can vary widely with circumstances.
A second rule says the amount you put into savings should be increased each year to match the inflation rate, else the value of your new savings will shrink year by year.
For 2010, inflation has averaged only about 1.1% through November, or 0.8% with volatile food and energy excluded. Over the long term, inflation averages around 3%.