Don’t Count on Windfalls

cash windfall

I’ve spent the past couple of weeks listening to the bitter complaints over the “loss” of the two percent Social Security tax holiday. In case you’ve missed it (or you aren’t from the U.S. and didn’t follow our “fiscal cliff” debacle), here’s the gist: Two years ago our politicians reduced the Social Security tax rate from 6.2% to 4.2%. This resulted in a two percent “raise” for workers. Since Social Security needs that money to remain solvent, the cut was never designed to be permanent. It was a way to help stimulate the faltering economy for a little while.

Now that the cut has expired and tax rates have returned to their normal levels, Saving Advice forum user bjl584 summed up the reaction by saying, “You would think the world is ending” People are bemoaning the loss of this extra money and are bitter because now it means that they will have to cut some things from their budgets. While I can sympathize to an extent (after all, who likes to see their paycheck go down), the mistake was in learning to count on that money in the first place.

I and many other people took the view that the tax cut was a windfall. We knew it wouldn’t last forever, so we didn’t make it a part of our daily lives. Some people increased their retirement contributions. Others just pushed it into a savings account. Some may have taken an extra trip or bought something frivolous with the money, but they did so knowing that it was a one time deal, not something they’d be able to repeat year after year.

Other people got too used to that extra money. They increased their lifestyle a little bit. Maybe they bought that new cell phone and used the money to subsidize the data plan. Maybe thy subscribed to some pay TV channels or ate out more often. In essence, they were doing what the government hoped they would — pump that money back into the economy. The problem now is that they “need” that money in order to meet their obligations. Now that the money is gone, they’re going to have to give up some things that they’ve grown accustomed to and they don’t like it.

This is a simplification, of course. There are people who genuinely need that money to get by. Maybe they had a pay cut or a job loss and they’re trying to catch up on bills. There are some who came into the workforce while the cut was in effect so they never known what it’s like to live with a higher tax rate. In those cases my sympathy extends further. But most of the people that I know personally or in the virtual world who are complaining fall into the former camp. They used the money to upgrade their lifestyle and they don’t want to cut back.

You see this all the time with things other than government tax breaks. People come to count on bonuses and high tax refunds. If they get a bonus or refund of $3,000 one year and then the next year it falls to $2,000, they freak out because they were counting on getting $3,000 again. Some people even expect more every year, not less. When the amount goes down they don’t feel like they were “given” $2,000, they feel like $1,000 was “stolen” from them. Then they have to scramble to make ends meet again.

Counting on windfalls year after year leads to trouble. Things like tax breaks, bonuses and tax refunds aren’t under your control. The government can change a tax rate, eliminate or reduce a deduction, or eliminate a tax cut. Your employer can do away with bonuses altogether, or reduce what you receive. You don’t have any control over what you receive or don’t receive. You can hope you get the same next year, but you’d better not count on it. Sure, your employer could also cut your overall pay by five percent and that’s not in your control either, but you’re better off counting on your wages remaining the same than windfalls happening every year.

When you get a windfall, use it wisely. Increase your retirement contributions or put it into savings. Use it to pay down any debts that you have so that when the windfall dries up you’ll have more ready cash to work with. Use ti to do some much needed maintenance or replace some appliances so that when the windfall is gone you don’t have to take that money from your “reduced” wages. You can do some fun things with a windfall, too, like take a vacation or buy something you’ve always wanted, just don’t expect to be able to do the same thing (or more) next year.

A windfall should never be factored in to your day to day budget for necessities or things that require payments like cars and mortgages. Keep your daily spending as it was before the windfall and you’ll be better positioned to deal with “the end of the world.”

(Photo courtesy of aresauburn)

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6 Responses to Don’t Count on Windfalls

  1. You should never count on temporary money. I am actually getting a little tired of hearing about the tax “increase” as some like to call it. I knew my paycheck before and didn’t change my lifestyle because of some extra money. This made the “increase” manageable for me.

  2. creditcardfree says:

    Well said!

  3. LuckyRobin says:

    I don’t know of anyone making “bitter” complaints about it, so much as general disappointment or annoyed grumbling. And really, that 2% was most likely compensating for the well over 2% rise in the cost of food, gasoline, and electricity during that time period for many, many people while income remained stagnant or was even cut. Personally, I would not be so annoyed about the higher tax rate if the government had agreed to cut some of the spending, too, but it seems they want to increase the spending even more than the higher rate will compensate for, when what they should be doing is tightening their belts and trying to live within their means for once.

  4. Aleta says:

    I totally agree with you. To begin with that money should have gone to social security, yet we hear how social security is going broke. Next, it’s much like getting a raise or any new money that can be used to pay down debt or add to your retirement.

    The problem is that people got used to it and relied on it for extra money to spend. Had they payed down debt they would have seen their interest payments decreasing and maybe paying off that extra payment a month.

  5. Genny says:

    What people are forgetting is that this is our money; our hard earned income. The government forces us to participate in this insurance program, whether we like it or not, but that is not germane to this discussion.

    Yes, people spend foolishly. People spend beyond their means. But I do not fault the individual for choosing to do with the extra 2% in their paycheck as they wished, because it was their money, and they earned it.

  6. Gailete says:

    As self-employed people we never see a paycheck or a list of deductions, so I wasn’t actually aware of this cut or the un-cut. As someone that depends highly on Social Security due to disability I do get amused by people thinking that SS is a program they are being forced to participate in. If you became suddenly disabled, I’m sure you would be more than grateful for the benefits you would receive, also not germane to this discussion but an observation from someone that didn’t expect things like this to happen to them.

    If the reason that folks got that 2% windfall was to stimulate the economy, well the government wanted them to spend it frivolously or non-frivolously, but spend it please to stimulate the economy. I too would have probably tried to set it aside and not get used to it and since it was a fairly small amount for a weekly or bi-weekly paycheck, it could have been easily swallowed up into day to day living. Only those that are the most disciplined and with their financial lives in order are able to see that in a few years they would lose this amount and thus set it aside so they wouldn’t depend on it, just like some are advised to when you get a raise, set the raise aside and continue to live on the old income until you get yet another raise and they you can if you like, put the previous raise into active use.

    I do understand the living hand to mouth and I sure wouldn’t berate the people that did it. When I saw the title of this post I was thinking windfall as an inheritance, a huge bonus, winning the lottery to the tune of $1-10K kind of thing. Those things that seem like so much and then disappear so quickly. A small amount in your paycheck can make the difference between keeping the lights on or not to some, and now that option has been removed.

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