Putting Social Security Savings to Use

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NEW YORK (MainStreet) – The 2010 gift-giving season is over, but a gift for 2011 will start arriving in just a few days – and will keep on coming for 52 weeks. It’s the cutback in Social Security payroll deductions approved as part of the recent tax-cut compromise.

For the coming year, the Social Security withholding will be 4.2% instead of 6.2%. The idea is to give consumers more to spend to stimulate the economy. So, what’s the best thing to do with this little windfall?

Granted, a 2% raise won’t rock anyone’s world. But it’s still something, given that so many people are going without raises. If you earned $1,000 a week, the cutback in Social Security withholdings should increase your take-home by $20.

At this time of year, many people will find the best use of that extra income will be to accelerate payments on the credit card debt run up over the holidays. If your card charges 18%, extra payments to reduce the card balance will “earn” 18%, since they will allow you to avoid interest charges at that rate.

Use the Credit Card Payoff Calculator to figure the benefits. Generally, it makes sense to attack the card balance charging the highest rate first.

Another good use for this Social Security money: boosting long-term savings and investments. As a rule, most people should save around 15% of their gross income, though the figure can vary widely with circumstances.

A second rule says the amount you put into savings should be increased each year to match the inflation rate, else the value of your new savings will shrink year by year.

For 2010, inflation has averaged only about 1.1% through November, or 0.8% with volatile food and energy excluded. Over the long term, inflation averages around 3%.

With your 2% Social Security “raise,” you could get a little ahead of the game, in case inflation goes up faster than usual sometime in the future.

At a normal, 15% savings rate, the person earning $1,000 a week would save $150. Increasing that by 1% to reflect inflation for 2010 would add only $1.50. But if this worker put the whole $20 from Social Security into savings, to put aside $170 a week, savings would rise by 13.3%. That’s a good head start on some future period of higher-than-normal inflation.

Since it’s winter, another good use for the Social Security windfall would be to make the home more energy efficient.

Obviously, this extra income isn’t enough for major improvements like new windows or replacing attic insulation. But it would buy plenty of caulk for around the windows, and sweeps to close the gaps under the outside doors.

And an extra $20 a week would quickly be enough for a water-saving showerhead, and it would buy a nice supply of fluorescent light bulbs. Save it for six or eight months and you’d have enough for an energy-efficient water heater.

Sure, there are lots of other things to do with some extra cash. But the savvy worker will find uses that will produce lasting benefits. Buying an extra pizza or two every week will help the pizza shop, but it won’t do anything to improve your own finances.

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