A Tax Re­bate? Feed Piggy.

The Washington Post - - National - Michelle Sin­gle­tary

Once the blus­ter has set­tled down on Capi­tol Hill, mil­lions of tax­pay­ers will likely be get­ting a tax re­bate later this year.

What­ever the amount, which is still be­ing de­bated, Pres­i­dent Bush and the other pow­ers that be are hop­ing that peo­ple go right out and spend the money to boost the econ­omy. To pay for the re­bate, the fed­eral gov­ern­ment is go­ing to have to bor­row, in­creas­ing the deficit.

I could dis­cuss what a hor­ri­ble ex­am­ple our gov­ern­ment is set­ting. But what good would that do? What I will say is that it both­ers me that we are be­ing told to spend this money for the greater good. We are told that by spend­ing the re­bate, we can ei­ther help avoid a re­ces­sion or lessen the one we may al­ready be in.

When the last tax re­bate was given in 2001, peo­ple did ex­actly what the gov­ern­ment wanted them to do. For the most part, they spent it.

In 2001, about two-thirds of U.S. house­holds got a re­bate of $300 or $600, thanks to the Eco­nomic Growth and Tax Re­lief Rec­on­cil­i­a­tion Act.

The av­er­age house­hold spent 20 per­cent to 40 per­cent of the re­bate on non­durable goods such as food and cloth­ing dur­ing the three-month pe­riod in which the re­bate was re­ceived, ac­cord­ing to the Na­tional Bureau of Eco­nomic Re­search, a private, non­profit and non­par­ti­san re­search or­ga­ni­za­tion.

Not sur­pris­ingly, those who could least af­ford to splurge did just that. The house­holds that were more likely to spend the re­bate were those with “rel­a­tively low liq­uid wealth and low in­come,” the Na­tional Bureau of Eco­nomic Re­search found.

For many peo­ple, the best thing fi­nan­cially would be to save the re­bate money — not spend it.

“I have to be­lieve if some­one put into prac­tice re­spon­si­ble use of this money, Amer­ica will be bet­ter off,” said Gail Cun­ning­ham, se­nior di­rec­tor of pub­lic re­la­tions for the Na­tional Foun­da­tion for Credit Coun­sel­ing.

If you don’t have an emer­gency fund, use this wind­fall to start one. If you’ve got small debts that have been caus­ing you to lose sleep at night, pay them off.

Even if you have some debt, con­sider start­ing a rainy day fund, Cun­ning­ham said.

“If you’re not pay­ing any bills late and you are able to limp along, then sock away the money for that emer­gency fund,” she said. “Com­mit to leave it alone be­cause it’s not a mat­ter of if an emer­gency is go­ing to hap­pen, it’s when.”

Cun­ning­ham be­lieves, as I do, that there are few, if any, un­ex­pected ex­penses. If you have a car, it’s go­ing to need some main­te­nance or re­pair. If you have a home, some­thing even­tu­ally will need to be fixed or re­placed. Got kids? They will prob­a­bly break, stain or de­stroy some­thing. Th­ese are all costs that you should

On the air: Michelle Sin­gle­tary dis­cusses per­sonal fi­nance Tues­days on NPR’s “Day to Day” pro­gram and on­line at www.npr.org.

By mail: Read­ers can write to her at The Wash­ing­ton Post, 1150 15th St. NW, Wash­ing­ton, D.C. 20071.

By e-mail: sin­gle­tarym@wash­post.com. plan for.

“A lot of peo­ple who come to us for fi­nan­cial coun­sel­ing say it was an event that pushed them over the edge,” Cun­ning­ham said. “No, it’s not. It’s the lack of prepa­ra­tion for the event.”

So should you save or pay down debt first?

If you have at least one month’s worth of liv­ing ex­penses saved but you have credit card debt, es­pe­cially with a dou­ble-digit in­ter­est rate, use the money to pay down that debt, Cun­ning­ham ad­vises.

If you want to give your­self a psy­cho­log­i­cal boost, con­cen­trate on pay­ing down the debt with the low­est bal­ance. This way you get an im­me­di­ate jolt by see­ing one debt re­duced sig­nif­i­cantly. Or pay off a num­ber of small debts.

The Na­tional Foun­da­tion for Credit Coun­sel­ing of­fers th­ese other tips for us­ing the re­bate money:

Fi­nally open that re­tire­ment ac­count you have been putting off.

Make needed re­pairs. Of­ten peo­ple put off small re­pairs be­cause the money isn’t there or it’s needed for some­thing more ur­gent. Why not use the re­bate, for ex­am­ple, to check out the squeaky brakes on your car or fix some­thing around your home that if left un­done could cause big­ger prob­lems later?

Make your house more en­ergy ef­fi­cient. We all know en­ergy costs are ris­ing. So why not use this wind­fall to buy some items to cut your en­ergy bill?

Put the money to­ward a spe­cific goal. For ex­am­ple, ear­mark the money for this sum­mer’s vacation, a child’s or­thodon­tic work, Christ­mas 2008, or start a col­lege fund for your chil­dren.

It may not do any good but I’m go­ing to say this any­way: Don’t lis­ten to the pow­ers that be. Many of them make more money than you do. The cur­rent an­nual salary for rank-and-file U.S. rep­re­sen­ta­tives and sen­a­tors is $169,300.

If you are strug­gling to pay your debts, liv­ing pay­check to pay­check, use this wind­fall wisely, what­ever your in­come. You can’t af­ford to be wor­ried about the macroe­co­nomic state of the econ­omy. You need to fo­cus on the eco­nomic state of your in­di­vid­ual house­hold.

BY DIM­ITRI VERVITSIOT­IS — GETTY IMAGES

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