A Tax Rebate? Feed Piggy.
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
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“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.