How to Spend Your Tax Refund or Economic Stimulus Rebate Wisely

If you're new to "Think Your Way To Wealth", get free updates on debt reduction, saving money, and building wealth by subscribing to the RSS feed or via Email . Thanks for visiting!

Many people will be getting money from the U.S. Government over the next few months. Some will be getting a tax refund, while others will get the economic stimulus rebate (Remember you need to file your taxes for 2007 1st in order to get the rebate!), or both. While most people get excited at what could be considered a “windfall” of sorts (although the refund is really an interest-free loan you provided the government over the last year), take some time to think before you spend. Below are several ways to “spend” or use your tax refund or economic stimulus rebate wisely.

Start or add to an Emergency Fund-If you don’t have an emergency fund, you need one now. Start with some amount, $250, $500, $1000, based on whatever you are getting back from Uncle Sam, or a part of it, and park it in a online interest bearing savings account such as ING Direct. (if you use a link from my ING referral page and deposit $250, you will get $25 free, and I will get $10). If you are just starting an emergency fund, continue to add something to it out of every paycheck until you reach an amount that you feel comfortable with.

Pay off Debt-This is a no-brainer. If you are in debt, this is a great way to knock down a significant amount that you may not have been able to do otherwise. If you have an emergency fund, and are still in debt, especially higher interest debt like credit cards, use your rebate or refund here.

Open or fund a Roth IRA-If you have a tax refund, you can fund a Roth IRA for 2008. A trick you can use to fund a Roth IRA for 2007 (must be funded before April 15th), if you have a well-funded emergency fund and are getting a tax refund, is to borrow it from your emergency fund after you calculate what your refund will be. You then file electronically, and you will likely get your refund within about 2 weeks, after which you can replenish the amount back to your emergency fund. (Don’t forget to put it back!) You could possibly do this with your economic stimulus rebate, but you will have to wait until the check arrives, so you will have to take a little more risk until you can put the money back in your emergency fund.

Open a College Savings Fund- Open or add to a 529 account for your child(ren).

If you do spend it, spend it wisely- Don’t use it to add a recurring expense to your life, especially a depreciating asset. Even if you aren’t in any debt, and want to get into the “boost the economy spirit”, use the money wisely. For example, don’t go out a buy a new car because you now have a down payment. Instead, place it in a high interest savings account and save for a new car. If you buy a new (or used) car and finance the remainder, you are only adding to your monthly expenses over the next few years. You windfall has created a recurring liability that you will have to pay for out of your own money for the length of the financing agreement. In fact, even buying a new LCD TV could add a recurring expense to your bottom line. You may decide to add an HD package to your or additional cable channels to your cable or satellite package, thereby adding $20 or more to your regular monthly expenses. Whatever you do spend it on, try not to purchase something that will increase your monthly expenses.