Personal Finance Advice

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)