Beginning in February, 90 percent of households will see more take-home pay, according to the U.S. Treasury.
The fatter paychecks are a result of recent tax overhaul legislation that cut taxes on average for all income groups, according to a recent analysis by the Urban Institute and Brookings Institution’s Tax Policy Center.
In fact, the analysis found that just 5 percent of taxpayers will pay higher taxes in 2018 than they did under the old tax code.
You can expect this newfound cash to begin making its way into your paycheck in February as smaller amounts are taken for tax withholding. According to the Treasury Department:
Employers are encouraged to implement the new withholding tables expeditiously but should do so no later than February 15, 2018. Workers will see changes in their February paychecks once employers adopt the new guidance.
It might be tempting to celebrate that found money with a splurge on a new toy, or a trip to the spa. But you would be much better off directing that cash toward other things.
Here are five ways you can turn your February “raise” into something that will pay bigger dividends.
1. Pay down debt
Debt is the No. 1 killer of wealth. Every cent you apply to paying down your financial obligations gets you one step closer to financial freedom. As Money Talks News founder Stacy Johnson has said:
Ever hopped in the car and started mindlessly driving around, assuming that sooner or later you’d arrive at an awesome destination? Probably not. If you want to be somewhere awesome, step one is deciding exactly what destination fits the bill. Step two is to find the shortest path to get there.
Stacy has some great ideas for mapping out your journey to a debt-free life. Read about them in “Ask Stacy: What’s the Single Best Way to Pay Down Debt?”
2. Boost your retirement
The power of compounding is truly miraculous. Let’s say that thanks to tax reform, you get an extra $1,000 in your household paychecks each year. For the next eight years — the amount of time you have before the new tax rates are slated to expire — you invest each year’s extra $1,000 in a tax-deferred retirement account by purchasing a stock fund returning 10 percent annually.
To make the picture even rosier, let’s say you leave the money untouched for three decades. In some years, the stock market declines, and you lose money. In other years, you see big gains. But overall, the market continues to return close to its historical annual average of about 10 percent.
At the end of 30 years, you’ll have earned nearly $100,000 — all on an $8,000 investment.
For more on the power of compounding, check out “How to Save $500,000 in 15 Years.”
3. Create an emergency fund
Investing for retirement is great. But if you barely have two nickels in your pocket, you need to be thinking about today, not 30 years from now.
An emergency fund is a pot of money you can turn to when the car needs to be repaired, or the furnace flames out. If you lack such savings, start building an emergency fund with the extra cash in your paycheck.
Will it be difficult to hold on to that new cash before spending it? Of course. If you are living paycheck-to-paycheck right now, the idea of saving anything might seem impossible.
But think about it this way: Before tax reform, you didn’t have that money at all. And somehow, you managed to get by.
So, save the extra cash for a rainy day, and give yourself a little peace of mind. For more advice on creating an emergency fund, check out “Struggling to Build an Emergency Fund? Try This Instead.”
4. Pay down the mortgage
For most Americans, the mortgage payment is our biggest monthly expense. Using the extra cash in your paycheck to pay down the mortgage faster can have a much bigger financial impact than you might imagine.
As we point out in “7 Painless Ways to Pay Off Your Mortgage Years Earlier,” you can reap huge savings simply by taking your monthly mortgage payment, dividing it by 12 and adding that amount to each month’s mortgage payment:
For instance, with the $1,013 monthly payments in the example above, one-twelfth is $84. MortgageCalculator.org’s extra mortgage payments calculator shows that adding $84 to the normal payment saves $27,571 in interest on a 30-year mortgage and pays it off four years and three months sooner.
For more on this topic, check out:
- “Ask Stacy: Should I Pay Off the House?“
- “Ask Stacy: What’s the Fastest Way to Pay Off My Mortgage?“
5. Invest in yourself
The tax overhaul kept two important education tax breaks in place:
- The American Opportunity Tax Credit (AOTC). Worth up to $2,500 per year, it can help pay for expenses from the first four years of a student’s higher education.
- The Lifetime Learning Credit (LLC). Worth up to $2,000 per year, “it can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills,” the IRS says.
So, why not take some classes to boost your career? Or take a class simply for the joy of learning. Using the extra funds from your new, lower tax rate and applying it in a way that gets you an additional tax break is a great way to score some sweet revenge on the tax man.
How will you use your bigger paycheck? Share with us in comments or on our Facebook page.