Yes, it’s that time of year again, when the air becomes cool and crisp; when football, jeans and sweaters are back in season; and when many working Americans blessed with higher incomes find more of their hard-earned dollars in their paychecks. Why? Because the maximum taxable earnings for Social Security (OASDI) taxes is capped at $110,100. Everything you make over that number is still reduced for federal and state income taxes as well as Medicare, but the 4.2% Social Security tax is avoided.
So what to do with this “found money”? We’re talking about amounts worthy of deliberation here, so the only real sin would be to do nothing—to be knowingly (or unknowingly) ignorant of the bonus and allow it to slosh around in your checking account earning .0000001% only to get incidentally gobbled up by the discretionary cash monster that is life. I don’t care so much how you use it, but that you use it for a purpose. Consider, then, applying your bonus to one or all of the following: SAVING, SHARING or SPENDING.
Sound elementary? Like the advice your grandfather gave you when you were seven or the advice you’ve given your kids? Simple, yes, but it’s not easy. One of the timeless truths of personal finance is that a balanced approach to these three objectives benefits everyone, regardless of the number of zeros on your personal balance sheet or income statement.
The inverse of savings is debt, and in an interest rate environment where your cash savings is almost certainly earning less than you are paying on any debt, the primary goal of your Social Security bonus should be to accelerate your debt repayment on any bad debt. There is no “good debt”—only bad debt and better debt. Bad debt is a loan on a depreciating asset—like a car, couch or TV—and worse debt is that which is revolving, like credit cards.
If you’re fortunate enough to not have any bad debt, how are you doing on liquid savings—savings that is either in pure cash or invested in stocks, bonds and mutual funds outside of retirement accounts? If you’re in a dual-income household with stable salaries, consider maintaining three months of living expenses in pure cash. If you’re a single income household or your income is volatile, consider six months; and if you’re self-employed, I’d like to see you sitting on a year’s worth of expenses. If you’re falling short in this category, your Social Security bonus is a great way to pad the financial margin that you WILL need at some point.
Giving is without a doubt the most underrated financial to-do on most of our lists. Despite the inherent personal benefits, we tend to see giving as something that moves us backward financially, but the benefits of giving are not merely enjoyed by recipients. Anyone who’s ever engaged in mindful giving can likely speak to the proverbial truth that “it is better to give than receive,” but this ancient saying is now growing toward consensus within the realm of financial pros and the medical community, as Carl Richards articulated so well in his recent article (and drawing), “Spending Your Money to Make Someone Else Happy.”
But in addition to the evidence that “it’ll make you feel good,” giving also has financial benefits. When we better acquaint ourselves with the needs of others, we have a tendency to treat ourselves to fewer $6 coffees and $5,000 suits, and find more cash in the coffers. But in the case of your Social Security bonus, spending some of that found money on a worthy charitable cause could—in addition to doing some good—put dollars back in your pocket around tax-time thanks to a deduction.
Spending is only listed last among these seemingly more virtuous options because of its relative alphabetical standing, not for lack of importance. Indeed, spending is like fine wine, craft beer and single malt Scotch—overindulgence brings pain, but wise application is downright blissful. Planned spending, some argue, lacks a certain exuberance that accompanies spontaneity—but not if you plan for spontaneity. I recommend establishing a slot in your budget specifically designated for spontaneous expenditures for you and your family. Then, in addition to the rush of impulsiveness, you can avoid the hangover of having to find a way to pay for it.
And remember, that time of year when many of us increase our spending on ourselves and others is fast approaching. Your Social Security bonus is a great way to sock away money for gifts, Fraser Firs and holiday parties.
If you’re fortunate enough to have sufficient income to cross over the Social Security threshold, you have reason to be thankful. Interestingly, some assume that the need for budgeting erodes as our income rises, but I do believe that “to whom much is given, much is expected,” and what better way to satisfy that maxim than knowing where your money is going.