The Miser’s 3 Things:
- Take a look at your most recent paycheck. It probably was bigger because of withholding changes brought on by the new tax law.
- Having a strategy for this small windfall will help prevent “lifestyle creep.”
- Consider putting your money to work paying off debt or bumping up your retirement contributions.
Companies had until February 15 (today) to make withholding changes mandated in the new tax law. Many, including my employer, already did so. If you don’t see a difference in your paycheck this week, ask your boss or HR department what’s going on.
The Miser’s bi-weekly paycheck went up by $75. But The Miser being The Miser, the first thing he thought was not “woo hoo!”
Instead, his first thought was of the dreaded lifestyle creep.
Lifestyle creep is a steady increase in a person’s discretionary spending after a rise in income. This can take many forms: finding a more expensive apartment, buying memberships or subscriptions you don’t need, buying home décor, etc.
This — combined with other expenses you can’t control, like rising health care premiums — can quickly eat up whatever raise you got.
And it’s an even bigger issue in the aftermath of the tax law, because some have warned that the new withholding tables will cause some workers to get too much money, meaning they’ll owe taxes in April 2019. That means you don’t want to spend all that money now.
Here are four ways to put your minor windfall to work instead.
Pay off debt
Do you have a student loan? Car loan? Credit card debt?
Depending on your salary and other factors that contributed to how much your paycheck grew this month, you might have an extra $100-150 in income.
Throw that at your debt, and you might be able to cut several months off your repayment plan.
Start by writing down whatever debts you owe. Make sure to include personal loans, such as one you got from a family member. From there, you’ve got some options.
You can start by attacking the smallest debt amount, knock that out, and move to the next smallest debt (called the snowball method), or attack the account with the highest interest rate first.
Pick whichever method will make you the most aggressive in paying off your debt.
Bump up your retirement contribution
After looking at my pay stub, the first thing I did was log into my 401(k) account and increase the contribution by 1 percent.
That accounted for roughly half the $75 increase in my paycheck.
It’s a good idea to increase your retirement contribution every time you get a raise. If you get annual raises, most retirement managers (like Vanguard) even allow you to set up automatic 1 percent increases yearly.
Think of the withholding changes caused by the tax law like a small raise. Why do anything different this time?
Increase your retirement contribution by 1 percent. Then, if you get a raise from your employer this year, increase it by another 1 percent. This will get you on your way to that magic 15 percent target.
This is a great way to prevent that dreaded “lifestyle creep” because your employer is depositing the money straight into your retirement account. You never see any cash, meaning you’ll never miss it.
Invest the rest
If you have no debt and have bumped up your retirement contributions by 1 percent, you might have some money left over. You could just put the rest into your high-yield savings account.
Or, you could open an investment account.
There are several investing sites geared toward millennials and people who are just starting to get into the stock market. Some of them allow you to open an account with as little as $100. (Check out these links for write-ups on Betterment and several others.)
Save up a couple months of your paycheck increases and open an account. Choose a fund that gives you exposure to various sectors of the economy (some of these sites will do this for you).
Then comes the most important advice: make regular contributions! Even $25 invested every two weeks adds up to $550 a year.
Buy an experience
Maybe you just can’t bring yourself to put every penny of your small windfall into stocks, savings, or paying off debt.
You — like The Miser — might have a vacation fund. If so, you probably make small, regular contributions in the hopes of going someplace warm, exotic, or fun. Basically, the opposite of a Midwestern winter, which The Miser is currently experiencing.
If you don’t have debt to pay off and have increased your retirement contributions, you can make a few small contributions to your vacation fund to ensure you can go on that upcoming trip you’re planning.
The Miser is a big fan of experiences — whether it’s as a gift, an educational opportunity, or a way to connect with nature — instead of buying extra stuff.
Top photo credit pexels.com