In the coming weeks nearly 25 million Americans are going to be receiving a check in the mail from the U.S. Government. The money is certainly nothing to sneeze at since it can be as much as $400 per child under the age of 17. This is happening (the first batch of checks has already been sent out) because of the new tax cut bill that went into law back in June. Part of this tax law said that (paraphrased) 'retroactively back to January 1, 2003, the child tax credit will be raised from $600 to $1000 per child'. The cool thing about this law is that if you filed your 2002 federal tax papers and claimed the child tax credit then, you get a check now. Automatically. Important thing to note here: when you file 2003 taxes, you need to reduce your child tax credit claim by the amount you received in the mail, but don't worry, most tax people can handle this detail. The stated purpose of this huge influx of cash from the tax payers coffers in the government back to the tax payers themselves is to help stimulate the economy. That's right, it's all one big game to the people in power who want you to spend your money that they returned to you so that they can point to the charts and say 'See, the economy is rebounding, just look at all the stuff people bought last month!'. Check out Wal-Mart, they already have little helpful tags on the shelf telling you to bring in your rebate check and spend it with them. So in light of all the issues and reasons behind the check, and besides the fact of all the business' wanting to take it out of your pocket, there leaves one major serious question. What should you do with this windfall of money? Here's my suggestion in a particular order. 1. Pay Down Your Credit Cards If you have a credit card that you carry a balance on, you can receive an instant tax-free, risk-free return on your money by paying off that debt. No other investment can give you that guarantee. 2. Buy an item of Long-Term Value I mean buy things like home improvements, home appliances such as a stove or fridge, or maybe take night courses to improve your job marketability. Spend the money on things that will pay for themselves in the long run via adding value or convenience to your life. 3. College Savings This windfall is being created by your child so maybe you should spend it on the kid's education. Now is perhaps the time to start a college savings plan. Section 529 College Savings Plans are offered by many states. Check into your states plan, you may receive a state tax deduction for the contribution and the money grows tax-free under certain rules. There is also the Coverdell Education Savings Account which may be used for educational expenses at the secondary and college level. You can put away as much as $2000 a year. 4. Retirement Investment What about your ROTH IRA, if you're eligible and you aren't fully funded put the money there. There is also the traditional IRA, or a variety of other avenues in which your money will grow until you need it for retirement. Consider talking with a certified financial planner about your investments, but make sure they are a fee only planner. DO NOT SPEND the money on consumables like vacations, dinners, movies, cars, etc. These things are gone as soon as you spend the money, sometimes before you pay for them if you use the credit card. I believe that any windfall you receive should be spent wisely. Have a plan ready for those occasions when you do receive a windfall from the government or anywhere else, it will help resist the temptation to blow the money just to boost the economy. You only get one chance with your money, make it work the hardest for you. |
