Your Two Percent Raise!

Did you realize you received a two percent raise in January? How can this be? You say your boss would never give you a raise. Well this take home pay increase didn’t come from your boss… came from the federal government.

In Late December of 2010, President Obama signed into law a two percent reduction in the OASDI payroll tax. Old Age, Surviors and Disability Income tax, better known as Social Security tax, is withheld from your paycheck up to the maximum yearly limit. The 2011 limit is set at $106,800.  The change reduces the amount of tax withheld from your paycheck from 6.2% to 4.2%. That’s right; you received a 2% raise.

This tax reduction was meant to be a simulative move, but, as we move into summer, I realize that most people have no idea this is occurring.   Even those who are self employed receive this increase by a 2% reduction on the employee side of self employment tax (total self employment tax is reduced from 15.3% to 13.3%). This opportunity will only last for 2011, so I feel it’s important to take advantage of this free money and put it to work.

Ideas for your new found money

  1. Increase your 401k/403b/SEP contribution percentage by 2%
  2. Pay down debt with your take home pay increase
  3. Save for a rainy day
  4. Dollar cost average into your portfolio

While the above short list is not meant to be exhaustive, it’s simply a starting point to prove a larger point. If this 2% pay increase is absorbed into monthly cash flow and spent, 2012 could be a shock. A couple earning $100k could see their 2012 take home pay reduced by as much as $167 a month. If the money is put to good use in 2011 and viewed as a one year pay increase, the shock of the reversion back to 6.2% will be unnoticed.

The Social Security payroll tax reduction of 2011 is a gift. If we choose to use it wisely, we can maximize our potential to improve our financial well-being.  A 2% raise will not make us rich or solve our financial problems, but it can be the stimulating spark that begins the road to financial freedom.

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