What kind of impact will the Tax Cuts and Jobs Act have on your finances? That depends on whom you ask.
According to the Tax Policy Center, those earning less than $48,600 per year will see a federal tax savings of no more than $380 annually; those earning from $48,601 to $86,100 will get $930; and those earning $86,101 to $149,400 will see $1,810 extra. For someone paid biweekly, that works out to about $26, $35, or $69 per paycheck.
Using estimates from a wide variety of professions, Business Insider suggested annual changes of about $300 to $1,200, based on the model of a single, childless taxpayer who owns a house worth three times more than his annual salary.
Know Where You Stand
Not everyone is a single, childless homeowner, obviously; each case is different. In fact, depending on your circumstances, your overall tax bill might actually go up – even if you see extra money in your take-home paycheck – due to other tax act changes.
That’s why chartered retirement plans specialist Michael Dinich suggests that consumers run their 2018 expected earnings through a tax estimator calculator to compare what they’ll likely owe with what’s currently being withheld.
Doing so lets them “start planning tax reduction maneuvers,” such as saving for retirement (more on that below) or putting money into a health savings account.
But suppose you are on track to keep that extra $29 to $69 per paycheck. One of the more powerful yet effortless ways to improve your financial situation is to avoid lifestyle inflation — that is, to resist the urge to spend more as you earn more money. This allows you to grow your wealth without really making any big sacrifices or changes to your existing lifestyle.
So rather than let this extra cash trickle away, apply it toward a short- or long-term financial goal before you get used to seeing it in your account. Here are some ways to put that money to work.
#1: Save for retirement.
If you have a workplace retirement plan, use the extra funds to bump up your contribution – especially if there’s an employer match. “That’s an immediate 100% return on your investment,” says Teresa Mears, who blogs at Living on the Cheap. Since this is “extra” money, you won’t miss it – but you’ll “be really glad to have the money when you retire.”
No retirement program at your job? Start an individual retirement account. Don’t put this off another day, warns certified financial planner Delia Fernandez, who too often sees people in their 40s and 50s who haven’t saved much (or anything) for the future.
“It’s got to happen. You have to make it a habit of saving for retirement, no question about it,” says Fernandez, who works with middle-class clients in Los Alamitos, Calif.
For tips on how to find additional funds in your budget, see “Saving Enough for Retirement When Money is Tight.”
#2: Pay down credit card debt.
Some people say you should save for retirement before paying down debt. But unless your cards are at a very low (or 0%) interest rate, take care of them first.
This saves you a lot of money in interest, and once the balances are paid off, it’ll mean increased monthly cash flow – which in turn means more bucks for retirement and other financial goals.
#3: Create or add to an emergency fund.
I’ve said it before and I’ll keep on saying it: Having a dedicated fund to take care of life’s unpleasant surprises is essential. Some money pundits say you need three to six months’ worth of living expenses, but don’t think about that right now or you might never start. Instead, aim for saving $500 by the end of the year.
Or, maybe, in the next six months. That would be about $83 a month, or about $2.77 per day. Bank any tax-break funds that wind up in your paycheck, and also check out the “saving money” archives here at The Simple Dollar for help on finding that extra money.
#4: Put money into a college savings plan.
Your kid(s) may be able to graduate debt-free if you save for higher education now. Even if you can expect only a few hundred bucks extra in your paycheck, imagine how those dollars will grow over time. Putting an extra $35 every two weeks into your child’s 529 plan would mean an additional $23,628 in 15 years, assuming 7% growth.
#5: Accelerate auto loan payoff.
Anxious to get out from under? You should be: The sooner you get rid of the monthly car payment, the more cash flow will be available for longer-term goals. Apply your newfound funds to paying down more of the principal every month, without fail.
And while you’re at it, check out the possibility of refinancing the auto loan. Maybe you financed at the dealership last year because you didn’t know how to shop around. You could save hundreds or thousands by refinancing – and the extra payments you’ll be making will go toward a lower principal. Win-win.
#6: Investigate insurance.
Have you been living without renters insurance? That’s super-risky and the insurance itself is pretty cheap, so get yourself some quotes right now.
If you’re a homeowner, see if the policy you took out a few years ago is still enough to cover repair or replacement of not just the structure but your belongings.
Do you have term life insurance? This can be surprisingly affordable, especially if you’re young and reasonably healthy. Even if you don’t have a spouse and/or kids right now, who knows where you’ll be a couple of years down the road? Lock in a low rate for the next 20 or even 30 years.
#7: Put some money into your home.
Even if your tax-break money doesn’t amount to much, it will likely pay for some minor fixes like applying a protective sealant on a wood deck, installing a programmable thermostat, or changing over to low-flow faucets or showerheads. Even minor upgrades – a new shower curtain, a fresh coat of paint in the living room – can make a big difference in the way your home feels.
#8: Put some money into your car.
Looking at a scheduled maintenance checkup six months from now? Stash the extra cash in a dedicated fund, along with any other money you can set aside.
And if the maintenance is needed right now, borrow from savings and then put the extra money back in each week without fail. (Hint: Automate a transfer from each paycheck back into savings.)
Also on the topic of maintenance…
#9: Pay attention to your health.
If you’ve put off going to the doctor, the dentist, or the optometrist, make this the year you take care of business. Each paycheck, set aside the new money you’re getting to cover any co-pays, or borrow from savings and return it without fail. (Again: Automating is your friend. If you don’t see it, you won’t miss it.)
A number of ways to trim healthcare costs can be found in The Simple Dollar archives. For example, ask if you can get a discount for paying with cash instead of credit (I saved 5% on major dental work this way), and watch for discounts on dental and/or optometrist exams in the Val-Pak blue envelope, local shopper publications, and social buying sites like Groupon and Living Social.
#10: Build a deep pantry.
Resist the impulse to use the extra funds to take your spouse and kids out for pizza. Stock up instead on foods, paper products, cleaning supplies, and any other items your household uses most often. Bonus frugal points if you can get these items at a warehouse store, a discount grocery like Aldi or Fareway, or even just on sale.
Having lots of food on hand makes it easier to cook vs. getting takeout. In addition, the less often you go to the supermarket, the less likely you are to spring for items that aren’t on your shopping list but that looked/smelled so good.
#11: Buy a freezer.
You can get a small- or medium-sized freezer for $200 or less – maybe a lot less, if you luck into a deal on Craigslist or at an estate sale.
Having one lets you prep and freeze a bunch of future dinners, preserve homegrown fruits and vegetables (or local produce bought cheaply during the peak of the season), and stock up on irresistible grocery deals. Recently my partner and I took advantage of $1.97-per-pound ground beef, buying the limit of 15 pounds. Thanks to our freezer we have a lot of meatloaf, burger and chili makings safely stashed, and at an unheard-of-for-Alaska price.
The Bottom Line
Less than $30 may not sound like much. But it can make a big difference over time. Pretend that the tax act never happened – after all, you’ve been managing without it – and salt away those funds for future success.
Veteran personal finance writer Donna Freedman is the author of “Your Playbook for Tough Times: Living Large on Small Change, for the Short Term or the Long Haul” and “Your Playbook for Tough Times, Vol. 2: Needs AND Wants Edition.”
Simple Preparations, Big Savings: How Spending a Bit of Time and Money Now Saves More Money and Time Later
Six Fresh Ways To Think About Retirement Savings
20 Key Strategies for Finding Incremental Savings in Your Life