Posted on 04/24/2008 7:22:25 AM PDT by BenLurkin
Over the next several weeks, 130 million Americans will get some easy money, compliments of Uncle Sam. Well, it's actually courtesy of ourselves, the taxpayers.
But Congress and the president decided that giving Americans rebate checks is a great way to boost the economy.
The idea: Put some money back in the hands of Americans, who can be counted on to squander it. It's almost our patriotic duty to do so.
But we don't have to go along with this idea. We live in a free country, after all. So we can take advantage of this opportunity to bolster our personal finances.
This economic stimulus check serves as a reminder that every day we make financial choices that have a trickle-down effect on our lives.
Decisions Involve Trade-Offs
For example, if you spend money you have today on a flat-screen TV, that money isn't available for future needs or desires. If you instead invest that money for tomorrow, it's not available for your present desire to watch "American Idol" on that beautiful plasma screen.
Lastly, if you spend money you don't have today by financing a TV purchase, you commit future earnings to this expenditure. Since interest is normally levied in this scenario, your purchase could end up costing a heck of a lot more than the original price of the TV, making this the least attractive of all options.
Yet we routinely choose that option. According to a recent article in The Wall Street Journal, Americans are heaping on more debt, with average credit card balances up 9.5 percent in the first quarter of 2008 over the year before. Home equity lines of credit are up 8.1 percent. Credit card balances rose even more precipitously in California, Florida and Nevada -- the states most affected by the housing crunch.
Mixed Messages
Bankrate regularly sounds the drumbeat about these consumer trade-offs in its Financial Literacy Guide, of which I am privileged to serve as editor. The "fin-lit" team attempts to make the tortuous journey of personal finance an easier one for consumers to navigate. And we learn a lot about consumer concerns, too. In February, our savings poll revealed that 80 percent of Americans would like to save more money, except that the cost of living gets in the way. (Thanks for letting me hawk the series here.)
The problem is that our message -- and that of other worthwhile organizations -- is getting drowned out by louder, more insistent, marketing noise that urges consumers to spend, spend, spend.
So, are you planning to buy a big-screen TV in time for the HDTV conversion? Or have you traced the route to the Grand Canyon on a road map in anticipation of a cross-country trip? Or are you going to cave to that pretty gold bracelet?
Hey -- here's a chance to stash away some money. These rebate checks will range in value from $300 to $1,200, and couples with young children will get up to $1,800.
Practical Uses for the Extra Cash
During a recent visit to my home, the pest control guy started griping about the dire state of the economy. I asked him what he planned to do with his rebate check, and he said he's going to use it to pay bills. "I know that's not what I'm supposed to do with it," he added quickly.
Actually, he's in good company. A recent survey by H&R Block found that nearly half of Americans -- 45 percent -- will pay bills with their rebate checks and their tax refunds from the 2007 tax year. Two out of 10 (21 percent) will buy necessary goods or services (food, car repairs, etc.) with their rebate checks, while just 18 percent will invest it. Only about 16 percent of Americans will splurge on such things as electronics, jewelry or a vacation.
That's great news -- Americans are taking the opportunity to pay down their bills. The so-called bad news is that this might not help our economy all that much, 70 percent of which depends on consumer spending.
"Most economic analyses that I've read indicate that past rebates, such as the one in 2001, are not economic boosters," says Kay Bell, Bankrate's tax editor and author of Bankrate's Eye on the IRS blog.
"There is scant evidence that the 2001 money meaningfully increased economic consumption or growth back then. I don't expect the 2008 version to do so either," she adds.
In that H&R Block survey, by the way, more than 40 percent of the respondents said they wished the government would use the $168 billion economic stimulus package for a higher purpose, such as to reduce the national debt (37 percent), improve health care (32 percent), shore up Social Security (17 percent) or to improve education (15 percent).
I have to agree that I'd like lawmakers to address these problems, too. But I don't object to getting this check.
Sage Advice From the Experts
What does the smart money say you should do with this influx of cash?
"First, pay off debt, preferably high-interest accounts such as credit cards," advises Bell. "If you don't have debt, call the Guinness World Records people," she quips. "Then put the money into some sort of savings vehicle. Most people are woefully low on emergency funds, and with the recession -- yes, we are in one -- everyone should have a financial cushion."
Bud Hebeler, author of "Getting Started in a Financially Secure Retirement," says that people should be encouraged to put the forthcoming government check into 1) paying off some credit card debt; 2) their mortgage; or 3) into retirement savings -- perhaps in that order.
"I know this isn't what is wanted by the feds, brokers, retailers, etc., but it would be the best thing for the vast majority of baby boomers," he adds.
The National Association of Personal Financial Advisors suggests readers should strengthen their financial security several ways.
Best way to use your rebate money:
1. Contributing to an IRA. 2. Paying off high-interest credit card debt. 3. Saving for college. 4. Building a rainy-day fund 5. Paying off long-term debt such as a student loan or mortgage.
Any one of these actions will contribute to your financial health and by extension, that of the overall economy, because you'll be less dependent on social support systems to get through a crisis.
A Look at Your Options
So let's take a look at what you can do with a hypothetical payout of $1,200, assuming you're married and your spouse goes along with your decisions.
You can invest it in an IRA. And if you get a return of 8.5 percent on average, in 25 years it'll be worth $9,244. OK, that's not enough to retire on, but if you use it as seed money and continue to invest $1,200 a year for 25 years earning that return, it'll be worth $94,401. You have to admit, that's not chump change.
Or you can use it as a down payment for a big-screen Sony LCD HDTV selling at $3,000 and finance the $1,800 balance. If your credit card interest rate is 13 percent and you make only minimum payments each month, it will take you 13 years and three months to pay it off, and you will have paid $1,198 in interest. That's a total of about $4,200 for that $3,000 TV.
So if you're already saving money for retirement and your other goals, plus you have a healthy rainy day fund stashed away as well as no debt, then go ahead and splurge! You deserve it, and so does the economy.
But if you need the money for something, go ahead and use it wisely. You deserve it, and the economy will understand.
Longtime financial journalist Barbara Mlotek Whelehan earned a certificate of specialization in financial planning. If you have a comment or suggestion about this column, write to Boomer Bucks.
we do alot of driving and we have alot of kids to feed.
Since our gov won’t drill on our own soil for oil, much of our “refund” will go to higher gas prices.
Since our gov thought it was a great idea to put corn into gas tanks instead of oil we could drill for - the rest of the money will be going to higher food prices to feed the kiddies we are driving around.
Mark
I guess we're supposed to be happy that we get to pay taxes because some poor people don't get that priviledge.../sarcasm/
“Buy stock in liquor stores near colleges, because if the money flows before the end of the year, a lot of it will be going for kegs.”
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