Wednesday, May 7, 2008

Top 10 Ways to Spend Your Stimulus Rebate

Many people are expecting their tax stimulus rebates in the next couple of weeks, but how will you spend it? Here is a list I compiled of the top 10 ways to spend your rebate.

  1. Pay off high interest debt.
    • Payday loans, student loans, credit cards, etc. are always good to get rid of first because they give you a guaranteed return of whatever your interest rate is. If you have an 18% APY on your credit card, your $600 will not only be reducing your debt by $600, but will also be preventing you from paying the more than $100 interest that money would have accumulated this year.

  2. Pay off some of a mortgage or car loan.
    • Along the same lines as number one, paying off debt gives you a guaranteed return in the form of interest savings. Eliminating debt should almost always be the priority.

  3. Add to your emergency fund.
    • An emergency fund provides many benefits. It will greatly reduce anxiety since you know you are prepared for anything that comes your way. The first time something does come up, and you have funds available, you will really appreciate your emergency fund. Most advisers recommend saving an amount equal to 3-6 months worth of expenses.

  4. Add to your IRA.
    • An IRA, or Individual Retirement Account, is an excellent avenue for investing once you have your debt down to a manageable number and have a good padding in emergency savings. IRAs offer benefits such as tax-free or tax-deferred growth. Most people will want to use the Roth IRA first, especially if they are young. For more information on deciding which IRA is right for you, check this investopedia article.

  5. Put it towards a savings goal.
    • You should always strive to save for your goals and let interest help you, rather than slow you down. For short term goals see for a list of banks and their interest rates, and shop around for the best deal. If you have longer term goals, the stock market may be a better option. Try to avoid mutual funds with high expense ratios. You may even want to consider an Exchange Traded Fund invested in an index. may be a good option for those with more than $2500 to invest since they offer 10 free trades per month.

  6. Add to your taxable investments.
    • This is along the same lines as number five, but with no specific goal in mind. You are simply investing for the future.

  7. Make a home improvement.
    • If you've been putting off doing some home repairs, now may be a good time. Your extra cash can go a little bit further if you take advantage of some of the tax stimulus sales such as the 10% bonus from Sears.

  8. Make a car repair.
    • People are now trying to make their cars last longer (and they should!) as this article from the Atlanta Journal-Constitution points out. Personally, I think you should keep your car until it can't be saved. So part of that is getting things repaired or replaced when they go bad. This can be a good way to spend your rebate.

  9. Invest for your child's education.
    • There are several options in this arena. If you haven't started a college plan for your child, and funding their education is something you would like to do, there's no better time to start than now. This article from the Motley Fool compares your choices of pre-paid tuition, Coverdell ESA, and the 529 plan. From the article, "Due to the higher contribution limits and favorable financial-aid treatment, 529 savings plans are the best deals for most people."

  10. Donate it to charity.
    • Lastly, donating to charity can be a worthwhile cause. There are many charities to contribute to, including your local church, scouting troops, or the university you attended. As I mentioned in an earlier post, I am contributing to a memorial fund for a fellow airman.
Whatever you do, please be wise with your money and do not fall for places like this. And if you need to cash your check, Wal-Mart will do it for free.

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