Wednesday, February 13, 2008

Milk Your Economic Stimulus Rebates

The U.S. House of Representatives and the Senate have finally passed H.R. 5140, an economic stimulus measure that will put money into taxpayer’s hands. President Bush is expected to sign the bill into law in the coming days. The IRS thinks they should get the checks in the mail sometime in May, which leaves us plenty of time time start thinking about how we should spend this unexpected income.

How Big Will My Refund Be
Most families should expect to receive a $600 rebate for each individuals in the family that filed taxes last year that made at least $3,000 and less than $75,000 a person. An additional $300 will be included for each child in the family. Low-income people, including retirees on Social Security and disabled veterans who pay no income taxes, would also receive checks of $300. For those making over $75,000 a year, your rebate will be phased out as appropriate. In other words, we are not sure how much you will get; let us know when you get it.

It’s Patriotic to Splurge
When the checks are mailed in May, I'm sure it will be considered patriotic to splurge in order to burst our struggling economy. As fun and tempting as this may sound, it's probably not the best idea for most of us. So how should your family spend your extra $1,500? The answer for many depends.

Credit Card Debt
Are you one, like many, that has accumulated credit card debt that you can’t shake? Perhaps this refund will be a good place to plop your money. If you haven’t already done so, you should call your credit card company and request a smaller interest rate. I just recently did this and saw my rate drop from 21%to 9%, for just simply asking! Place your refund on the card with the highest interest rate, even if this amount does not pay off the balance, it will save you hundreds if not thousands in long-term interest payments. To become wealthy you have to stop paying interest and start making it, this is a great place to start.

No Savings?
Having a savings of at least two months of living expenses is recommended for everyone. It's ideal to have this money in something you can access very easily like a money market fund and not in assests such as individual stocks or a mutual funds. Even if you have built up debt to pay off, it may be best for you to put your rebate in savings. It's better to have a back up in case something unfortunate happens, although less debt is nice, you will not be able to make payments on anything if you lose your source main of income and have not built up a solid savings.

Pay More on Student Loans or Mortgage?
Although it sounds like a good idea to post an extra $1,000 on your mortgage payment or on your student loans, in reality this will not do much for you. Most mortgages and student loans have interest rates are around 5-9% (the lowest APR loans you can really get), although a lump sum extra payment on these accounts will be beneficial, the benefit is very minimal. If you are going to pay more on these loans, do it monthly with a goal of paying off the loans in x amount of years sooner than your current loan requires.

Max Out an IRA
We realize your rebates will not be in your hands before April 15, 2008 (the last day you can contribute to your 2007 IRA), but consider putting some of your rebate in your IRA for 2008. Sound boring, well it is, but consider this, $2,000 invested today growing at 8% annually would give you $21,871.46 in 30 years. Ah yes, the power of compound interest.

Treat Yourself
Making smart financial decisions everyday should be a top priority for you, but every once in awhile we deserve a treat! We would suggest taking about 20% of your rebate if this is reasonable for you, and buy something you have wanted for a while, perhaps a small flat screen for your bedroom or piece of art. I recently put a small LCD TV in our bedroom and I consider it the best art hanging in our place!

Like any unexpected windfall of money, what to do with it depends on our current situation. You'll have to take a step back and look at where the money can work best for you. Have some good ideas we didn't mention? Let us know about them! $

No comments: