American workers might be seeing a bit of a bump in their take-home pay, thanks to the new tax bill that President Trump signed into law in December of 2017.
The U.S. Department of Treasury and the Internal Revenue Service estimate that under the new tax bill, 90 percent of wage earners will see an increase in their paycheck. According to the nonpartisan Tax Policy Center, the bill will reduce 2018 taxes by an average of about $1,600.
But that’s the average.
Taxpayers earning less than $25,000 will see an average tax cut of $60. The top earners will enjoy tax cuts between $13,000 and $61,000 a year.
Most of us, those in the middle-income bracket who are earning $49,000 and $86,000 will enjoy a tax cut of about $900 under the new tax bill, according to the Tax Policy Center. That means middle-income earners might see a boost of about $34.60 per paycheck if they get paid every other week.
It’s not a lot of money, but it adds up throughout the year. And, while it’s always nice to treat yourself, the better way to use that money might be to funnel it toward something that will make your life better in the long run.
Here are some smart ways to spend the money you save under the new tax bill
Pay off debt
Instead of spending the extra money as soon as you get it, have your employer direct deposit the pay bump you’re getting into an account that’s dedicated to reducing your debt.
That increase of $34.60 every two weeks might seem like it won’t make any difference, but, consider this: If you have $4,000 in credit card debt with an average interest rate of 16.15 percent and pay $60 per month, it will take you 171 months to pay it all off. But, if you use that extra money and add $70 to that monthly payment for a total of $130, you’ll get rid of that debt in just 40 months and save a whopping $5,000 in interest.
You can do the math with Credit Karma’s debt repayment calculator.
Save for retirement
If you have a 401(k) plan or other retirement fund through your employer, ask them to direct the extra money there. Again, $34.60 might not seem like a lot — until you add up what it could mean for your retirement fund over the course of many years. For instance, depositing $900 annually in a fund with a 5 percent rate of return for 25 years will yield nearly $43,000. Edwards Jones has a retirement calculator that lets you see how much money you might be able to save.
Invest in education
Maybe your kids are college bound. And perhaps you are too. A college degree can give you a big leg up in your career and your financial health. In fact, a study from Georgetown University found that college graduates earn $1 million more in their lifetime than those with just a high school diploma. If you’re looking for an affordable education, community college, where the average tuition is $3,440 a year, is a great place to start. That extra $900 you might be getting in your paycheck this year could pay for a good chunk of tuition.
Fill up your emergency fund
Take a look at the pot of money that you should have set aside for a rainy day. Will it keep you afloat during a job loss or other emergency? Or does it deserve your attention? If your emergency fund is in need of some attention, it’s a great place to send any extra money in your paycheck so you know you can financially endure what life may throw your way.
The CESI Team is committed to helping you reach your financial goals. If debt keeps you from living the life you dream of, contact us for a free debt analysis today and get started on the road to a brighter future!