How to Use Your Tax Rebate Wisely
By: Scott Reeves, of Minyanville.com
Uncle Sam is about to slap some money in your hand. Now what?
The tax rebates (not to be confused with your income tax refund) are expected to begin arriving in May, and are intended to boost a sagging economy that may be slouching toward recession.
President Bush and Congress hope you’ll spend the money quickly, a reasonable thought because consumer spending represents about two-thirds of the nation’s economic activity.
The $168 billion plan includes tax rebates totaling up to $600 for individuals, and $1,200 for couples filing jointly. Families will receive an additional $300 per child. Those who paid no income tax, but earned at least $3,000 including Social Security, railroad retirement and disabled veteran’s benefits, will receive $300.
It’s your money, but many will consider it found money and spend it foolishly. Here’s how to be smart with your tax rebate:
1. Pay Yourself First – If you don’t have enough cash stashed in the bank to cover basic living expenses for at least six months, consider adding the rebate to your savings. Indirectly, you’ll do your part to pump money into the economy because the bank will put the rebate to work through mortgages, home improvement, and car loans – you name it. The bank will also pay about 3.5% interest on your savings. It’s better than nothing, so take it.
2. Fund Your Retirement – Tuck the rebate check into your 401(k) retirement account. Some employers will kick in as much as 50 cents for each dollar you contribute up to 6% of your annual salary. If your employer doesn’t offer this perk, open a Roth IRA. If your retirement account is adequately funded, consider using the tax rebate to open a 529 Plan to save for your kid’s education.
3. Repay Debt – If interest payments on credit card debt eat you alive, use the rebate to reduce the principal. Remember: a credit card is a short-term, high-interest loan – not free money. Use of a credit card makes sense only if you pay the balance in full each month, allowing you to use the bank’s money interest-free. If you’ve run up a large balance, stop using your card and pay the total amount off as quickly as possible. Over time, this will improve your credit score. You can save money along the way by transferring your balance to a low interest card from your current rate of 20% or more. Shop around. Some cards offer rates of about 8.25% and some introductory rates are even lower.
4. Home Improvement – Extra insulation in the attic will pay long-term dividends, especially as energy prices continue to rise. Double-pane windows will cut energy costs and reduce traffic noise, but are expensive and it will take years for them to pay for themselves. If your appliances are getting creaky, think about energy-saving equipment. The U.S. Department of Energy’s Web site and magazines such as Consumer Reports are good places to begin your research. If you’ve deferred maintenance on your car in an effort to cut monthly expenses, consider using the rebate to perform needed service. A well-maintained car will use less gas and reduce pollution.
5. Invest In Yourself – A college degree, especially an advanced degree, is the best way to boost your income. If you’ve got too many other commitments to even think about going back to school, even part-time, look into a university extension course or a certificate program offered at an area two-year college. Or use the money to pursue a life-long interest in fancy cooking. If nothing else, boost your mental health by using the rebate for a weekend escape with your spouse or sweetie.
6. Donate -- However, if you have all that you need, consider donating the money to charity or to your alma mater. Think back to all the Latin you never studied; alma mater means “nourishing mother” and your old school can always use a little extra money for the library, lab equipment or scholarships to feed the curiosity of the next generation of kids.
7. Other Options -- If you want to invest the rebate, take a look at gold -- a defensive play. In general, gold won’t appreciate like a hot stock, but it’s a good way to preserve your wealth in inflationary times. Oil prices are at or near all-time highs, suggesting no immediate relief from rising prices in the next six or 12 months. In addition to gold, he suggests taking a look at coal in Asia. Non-dollar denominated stocks and bonds are also worth a look, and those that trade in Euros may be a good bet. “I don’t believe we’re near the end of the cycle for gold,” Winmill says. Warning: Gold is not for the novice.
“Own as many hard assets as possible,” says Tom Winmill, portfolio manger for the Midas Fund in New York. “Pay down as much debt as possible. Avoid cash and bonds -- own things that can ride out high crude oil prices.”
Save or spend wisely!
About the Author:
Scott Reeves, father of three, is the personal finance columnist for Minyanville.com. He perfected the art of bouncing checks while studying the romantic poets at the University of California, Berkeley.