Although I don't think the timing was right nor can the state of the U.S. budget deficit and ever-weakening dollar justify the stimulus package recently passed, the checks will be cut shortly nonetheless. Aside from the tax refunds most people receive around this time of year, there will be additional checks coming that you probably weren't counting on.
At a high level, if you haven't already calculated how much additional cash you have coming to you, here are some high points:
For Single File Taxpayers, under $75K, this applies in full; over $87K income, no refund.
- If you earned more than $3,000 and paid taxes, you get $600.
- For each child you have, you get an additional $300.
For Dual Filing Taxpayers: Under $150K, this applies in full; over $174K, no refund.
- If you earned more than $3,000 and paid taxes, you get $1,200.
- For each child you have, you get an additional $300.
Invest it:
Well, this site is primarily dedicated to investing, so you can probably guess what I plan on doing. However, I don't think I'll be adding anything to my traditional trading account, but rather investing in my childrens' college savings funds as outlined next.
Start a new college savings account for your child - 529 or ESA:
I initially started the children off with an ESA given the lower fees, but by now, the 529 plans have really come around. You can also invest much more in the 529 plans. So, I'll likely add half to each kid's ESA right away and later in the year when I exceed the annual $2,000 limit, I'll be starting up a 529 for each. I've done some research and the Utah plan appears to be the best; will update more later on why (notice it doesn't have a huge participation because it is not advisor-affiliated so there's no financial incentive for financial advisers to recommend it).
Leave it in an emergency fund:
Given the jobs outlook and the current recessionary environment, anything can happen. Perhaps it's prudent for some to just leave this unexpected funding in a liquid account.
Pay Down High Interest Debt:
If you are paying 20% + interest on credit cards, payday loans, whatever it may be, immediately, pay down that debt. There's no investor in their right mind that would turn down a risk-free 20% return on investment.
Make an additional pre-payment on your mortgage, shortening the life of your mortgage:
There's a been a lot of hype lately on paying down your mortgage early. I will be doing a post shortly on a newfangled "system" that's being sold that I've found to be unnecessarily and frankly, a waste of time and money. For some, the peace of mind that comes with paying down a mortgage early is worth it. Most economic opinions do not favor pre-paying a mortgage. If you're in a 6% interest rate and deducting your mortgage interest at a 25% tax rate, you're paying down close to a 4.5% rate of interest and forgoing the opportunity to invest at a long term rate of 8%. Perhaps this is taxable, but then you're at 6% post tax, which exceeds 4.5 OR you can invest in an IRA and the equation changes altogether depending on various factors.
Donate it to charity:
Some people say, "I would do more of this if I had the extra money to spare". I'm one of them. We have a couple charities we participate in each year, but I haven't reached a point yet where I feel that I'm making a sustainable investment in something tangible. I was really burned on what happened with all the money I donated to Red Cross following 9/11 and now just stick to the American Cancer Society and local interests (fire dept, etc). However, maybe this is an opportunity for you to start giving if it isn't something you've done before.
Spend it on a vacation you didn't have planned:
Hey, it wasn't in the budget and you don't need it. Why not be a patriotic American and plough this money back into the economy like the politicians are requesting? When you're on your death bed, it's doubtful you'll look back and say, "I'm glad I skipped that vacation and saved some extra money back in 2008". These are tough decisions, but it's a good decision to have to make - to consume money you didn't intend on.
Buy a new widescreen television:
Well, all your neighbors have it and you don't. What will they think? These days, the prices of electronics are dropping and you can have a pretty impressive set for under the $1,800 for a family of four that will last for years. Why now?
What will you be doing with your additional refund? Vote at the poll on the left or leave your comments here!
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