Sat, April 26, 2008
Tax Rebates will come out early
I must confess: I expected the IRS to have a hard time meeting its original schedule for delivering tax rebate checks.
However, yesterday it was announced that 2007 tax rebates will start going out several days ahead of schedule. When the decision to boost the economy through tax rebates was announced, I figured that it was so close to tax season that the IRS would be scrambling to get rebates going by late May, but it appears they’re even expecting to get the paper checks out a week ahead of time. If you’re still wondering whether you qualify for a rebate, the IRS has provided a handy Economic Stimulus Act FAQ page .
Assuming you’ve decided not to do your part for the economy by going out and buying a flat-screen TV, what should you do with your rebate check? A suggestion: don’t spend it all in one place. If you really need to cheer yourself up a bit, go for it, but consider some better ways of putting it to use:
- Pay off high-interest debt
Yes, this one is a no-brainer. If you’re paying 18-24% interest on a credit card balance, take a crack at reducing or eliminating it. When you pay off a debt that’s charging you these interest rates, it’s like getting a guaranteed high-yield investment return. - If you’re eligible, fund a Roth IRA
Why are financial planners so obsessed with Roths? Probably because we suspect that tax rates are going higher, not lower, in the future. If that’s so, putting money into Roth is a great idea. Also, unlike most other retirement savings options, if you desperately need the money years from now you can take your original investment out of a Roth IRA without incurring a tax penalty. - Build up your emergency fund
I know that this sounds really boring, so I won’t argue that you should put all of the rebate in here - but do put in a healthy chunk of it. Why? Because (for example) no one can tell you when you’ll get laid off, have an unexpected medical bill that’s not covered by insurance, or need to replace your air conditioner during the height of summer. People often believe that they don’t need an emergency fund, but not having one leaves you very vulnerable if something unexpected happens. Most people should work towards having cash equal to three months of expenses set aside (or four to six months’ worth if your household depends on a single source of income). - Learn something new
You should be developing new skills constantly to keep advancing professionally. Take a course that’s relevant to your interests or buy some books on a topic that broadens your horizons. Our economy is shifting constantly; keeping your own store of knowledge updated is critical to avoiding professional obsolescence. Investing in lifelong learning will make you more flexible and help equip you to ride out unexpected changes in life. - Invest in something that allows you to cut your expenses
This approach can be tricky: buying a bread machine only reduces your bread costs if you actually use it. But if you love food and find yourself spending too much in restaurants, buy some tools that make it easier for you to do your own cooking. You still have to buy ingredients, but it’s really hard to spend more preparing a meal than the same meal would cost at a restaurant. Believe me, I’ve tried it a few times....
Also, given the recent increases in food costs, an investment in a home garden could be a great idea. Not everyone can do this, but determination goes a long way. I’ve seen people grow vegetables successfully in containers on a roof, or even in a sunny window.
