Ideas for Responsibly Spending Up to $4,000 in Extra Income

Consumer money resource offers mix of spending and savings strategies to take advantage of extra paycheck income from Social Security tax reduction.

SAN MATEO, CALIF. — Jan. 12, 2011 — Most Americans will see additional income in each of their 2011 paychecks because of a reduction in Social Security payroll tax agreed to as part of this year’s tax cut extensions. With the first wave of these larger paychecks being issued later this week or next, consumer money resource offers some simple suggestions on the best way to use this extra income.

"This Social Security tax reduction amounts to a raise for all Americans courtesy of Uncle Sam," said Virginia Sullivan, VP of Consumer Education at "The federal government’s hope is that we all run out and spend it to help revitalize the economy, but consumers should be cautious and build a plan to use the money in the best way possible according to their individual needs."

A calculator for finding the amount of additional income you could earn in 2011 as a result of this tax reduction is available online. It is estimated that over the course of the year an individual could earn a maximum of an additional $2,000 or $4,000 for a couple. offers three basic strategies for using these funds responsibly.

Spend it Responsibly

The natural reaction for many people will be to immediately spend this additional income. This is also the sincere desire of the federal government because it will pump more money back into the economy and help sustain the recovery.

However, it’s important to realize that these will be small increases in each paycheck. Instead of spending it on similarly small items each pay period, consider developing a plan to save money and use it for larger or necessary purchases.

An easy way to do this is by opening a connected savings account and automatically deducting the increase each month. At the six month or year mark, you will have increased your purchasing power and earned some interest on the money. Even though savings rates are relatively low, be sure to shop around for the highest.

"Many Americans have delayed large purchases over the last year or two as they waited for the economy to strengthen," continued Sullivan. "Consider accumulating this extra cash and then using it to purchase those items or buy items that will return value such as more energy saving appliances to replace those that are failing."

Eliminate Debt

The recession has forced many Americans to prioritize their spending, and families have responded with record levels of savings over the past few years. However, many individuals still face mountains of debt due to lack of income, job loss, or poor spending habits. By diverting the increase in each paycheck to pay down this debt, consumers can free up future income, raise their credit scores, and begin building an eventual nest egg as a financial insurance policy.

"Understandably, it can be emotionally difficult to use this extra money to pay off old purchases," acknowledged Sullivan. "But this is the best way to maintain solid financial footing and avoid future money issues if the economic recovery should falter."

Invest Wisely

This is perhaps the best of both worlds. Instead of spending the money frivolously, use the extra money from each paycheck to make larger contributions to your retirement or child’s education accounts. This will satisfy Uncle Sam and stimulate your bottom line at the same time.

"By putting extra cash into a tax deferred savings account, you can save money now while also putting money into the market and supporting those businesses," explained Sullivan. "Maximize the small salary bump through the magic of compounding interest."

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