There has been an awful lot of discussion in the news about the Economic Stimulus package. There has also been a lot of confusion. Today we’ll try to shed a little light on the package and what to do with the money if you qualify.
What you will get: According to the IRS web site, “Starting in May, the Treasury will begin sending economic stimulus payments to more than 130 million households. To receive a payment, taxpayers must have a valid Social Security number, $3,000 of income and file a 2007 federal tax return. IRS will take care of the rest. Eligible taxpayers will receive between $300 to $600 if single or $600 to $1,200 if married filing jointly. Millions of retirees, disabled veterans and low-wage earners who usually are exempt from filing a tax return must do so this year in order to receive a stimulus payment.”
There are other details that determine how much of a rebate you qualify for, such as up to $300 per child. To find out more, visit the IRS website.
What to do with it: Once you know what you will receive, the big decision is what to do with the rebate. The idea is that by giving you an advance refund on your taxes, you will go out and spend the money to generate business revenues, avoid layoffs, etc. The problem with the program is that spending money (and not saving) is exactly what most of us don’t need to do. Here are a few recommendations to make your rebate work for you:
1) If you don’t have an emergency fund, get one now. You need to have money set aside for when life happens. If your transmission goes out tomorrow, do you have the cash to fix it? Or will you use your credit card and pay the bank $18 for every $100 it costs to fix your car? Establishing an emergency fund gives you room to breathe and helps you avoid debt when (not if) you have a major financial emergency. Place the money in a good money market account that’s not too easy to access, but can be withdrawn within 24 to 48 hours when you need it. This makes it much more difficult to spend the money for convenience items, like suddenly remembering that Christmas is in December this year. On the flip side, you don’t want to tie your emergency fund up in a cd or mutual fund because you want to make sure the money is available when needed.
2) If you already have some money set aside for emergencies, pay off your debt, beginning with the smallest balance first while making minimum payments on your larger debts. Once the smallest debt is paid off, take the money you used to pay it off and start attacking the next smaller debt. You will experience the emotional feeling of success along the way by killing the small debts first and picking up speed as you progressively eliminate the debts you have.
3) Set aside some money for retirement. This year, qualified income earners can invest up to $5,000 each in Roth IRAs. You won’t get $5,000 from the economic stimulus rebate but if you invest just $1,000 in a Roth IRA and leave it alone for 40 years (your average working lifetime) it would grow to $118,000 tax free. The sooner you start the better so you can take advantage of compounding interest, so if you haven’t started yet get going!
4) If you have kids or are expecting children, consider starting a college fund. Investing $1,000 in an Educational Savings Account (ESA) today will grow tax free to over $5,500 in 18 years. Of course, if you invest a little money each month (say $50 per month) over the course of that 18 years, the account would grow to $36,000. That’s a pretty good head start for Junior to go to college without going into debt.
Any of these suggestions will put you in a better financial situation long term. Which one is right for you right now? Call us today to schedule a 30-minute free consultation to discuss how to prioritize your options.