Family Finances: How to Survive Social Security Tax Increase

Dear Diary,

Christmas is over, but the remnants remain in the Hopson household.  Although the red and green decorations are packed up and stored in the back of my closet, the tree still stands.  Before you judge me, note that it’s artificial and not dying and dropping pine needles all over the living room.  It sparkles and shines.  It’s the first tree that I purchased and decorated as a first time mom.  When I plugged it in, the colorful bulbs lit up and so did my daughter’s face.  We’re slowly moving the gifts from the floor to her room.  But because the tree makes her smile, I’ve decided to keep it up, at least for another week.  Then, I’ll come to terms with the fact that the holiday season has ended.

I’m not sure when I’ll come to terms with the so-called “payroll tax holiday” ending.  In 2011, the government reduced Social Security taxes from 6.2% to 4.2% as a way to stimulate the economy during the recession. The holiday was extended until the end of 2012, but it was not renewed for 2013. The reduction was never meant to be permanent, but I wish it would remain like my Christmas tree.  To help me face the fact that all good things come to an end, I contacted my friend and hip hop’s financial advisor Rob Wilson.  He helped inspire me to have a prosperous New Year despite the changes. 

How will the Social Security Tax increase impact the average American?

My thought is that it will not have a major effect on the average American. The increase boils down to $20 per week. It could mean going to Redbox versus a night out at the movies, but I don’t see this causing a major change in the average person’s lifestyle.
For some, a 2 percent increase is about $80 deducted per month. Doesn’t sound like a lot of money, but if you live check to check, it is! How can someone streamline their already tight budget?

Streamlining your budget has to start with actually knowing where your money is going. Do you know how much money you spent eating fast food last year? Probably not. You have to track your spending habits in order to change them. I suggest using an online platform such as Mint to track, categorize and report on the spending in all of your accounts. You would be surprised where you  waste that $20 each week.

Will Social Security be around when we retire? What should we do now to prepare if that safety net is no longer there to catch us?

Social Security will likely be around when we retire. However, the benefits that you receive will likely be less than what we’ve come to expect. Current recipients receive far more from Social Security then they paid into it. For example, a male average earner who retired at 65 in 2010 paid $345,000 into Social Security but will receive about $417,000 in total lifetime benefits (assuming average life expectancy). It’s unsustainable for Social Security to continue to pay out more than it’s bringing in.

What are ways people can save money? 

One way to put more money in your pocket is to change your withholding at work. Many people withhold too much from their paycheck, thus giving them a refund when tax time comes. While it’s nice to get a lump sum returned, it’s much better to have that money in your pocket during the year rather than loaning it to the Government at 0% interest. Update your withholding, and you can compensate for the higher Social Security  taxes.

Also, work on aggressively paying down your credit card debt. Each credit card payment you make includes interest, which only benefits the bank. By eliminating those payments, you’ll be saving yourself the amount of interest you pay every month.

Often if you don’t make much money, you don’t see the point in saving. Why is saving something better than nothing? How can you save money and still be able to cover all of your expenses?

Saving something is better than nothing because it’s that habit that matters most. Even if you only save $5 dollars per week, soon you won’t miss that $5. Then you can increase it to $10, then $15, etc. It’s much easier to increase the amount over time than it is to get started in the first place.

But you also have to be real with yourself. You can’t get blood from a stone. You can only cut so much out of your budget. Sometimes you just have a revenue problem. You should put as much time and even more effort into finding ways to increase your income as you do trying to streamline your budget. Most people can find at least one or two additional revenue streams if they just take the time to develop them.

What are the biggest money mistakes you see people make? How can someone avoid those pitfalls?

The biggest mistake by far is not saving enough. About half (49%) of Americans don’t have enough money saved in an emergency fund to cover three months of expenses. And forget about retirement. The average baby boomer is expected to fall about 44% short of the income needed in retirement to maintain their standard of living. In fact, according to a survey by the Employee Benefit Research Institute, just 14% of American workers feel as though they will have enough money to live comfortably in retirement.

I’d like to see people take a more disciplined approach towards saving money and investing. When you concentrate on building up savings, you can dictate the direction of your life and career as opposed to having it dictated to you.

I plan to file my taxes early this year. What are some tax tips to ensure I get back everything I’m owed?

My best advice would be to work with a tax professional. It’s not your job to be a tax expert, especially with all of the changes coming down this year. You should rely on people who look at this all day every day. Alternatively, you can use popular tax prep software such as TurboTax and TaxAct. Most simple returns can be filed for free, but if you are seeking advice and guidance on getting the most deductions, the additional fees will be well worth it. Plus, you can deduct the fee from your taxable income!