Well, it is that wonderful time of year again...Tax Time. Most of us will have to do our little dance with the IRS, filling out the endless bureaucratic forms, pledging our firstborn for debts, and hoping we don't get audited.
Some of us will likely be getting a refund from Uncle Sam.....some small, some large (I am very grateful for that child tax credit). Most of us will be getting the economic stimulus rebate as well. With a minimum $600 payment for adults ($1200 for married couples), and additional rebates for qualifying children (who said having kids wasn't worth it), it could turn out to be a serious pay day for a lot of American tax payers (here's to hoping that all of you are among the lucky ones).
The question then is, what to do with all that money? I've heard that most Americans overpay their taxes (by having too much withheld from their pay checks), banking on the tax refund to pay off debts, finance vacations, or force them to save a nice chunk of money. While the topic of tax withholdings is an entirely separate article, it is important to carefully consider what to do with any money the IRS will be sending your way.
Options
I'm going to Disneyland!
There will undoubtedly be many Americans who will channel their rebate and refund checks to pay for the annual family vacation. Whether it is Disneyland, Yellowstone, or Italy (which is my choice for my summer trip), be sure you spend those funds wisely.
I'm not advocating that you not take that trip, in fact part of the point of the rebate is to stimulate the American economy, and so taking that trip could be a good thing for everyone. Consider making it a nice weekend, a long weekend, instead of a two week extravaganza.
Check out sites that offer vacation packages, which often save you money. Just make sure you're not paying for a package that costs more, and getting extras you won't use. Be sure to compare prices between sites for the same packages or services to make sure that you are getting the best prices. Sometimes these sites will match prices from their competitors just to get your business. You may also be able to haggle out some extra features for your money.
Consider doing a local vacation. Visit all those fun and/or historical sites in your town or state. You don't necessarily have to go far to find something to do. Plus, by visiting local sites, more of your money will be circulating in areas that directly affect you.
Now might also be the time to spend those extra dollars to visit Grandma and Grandpa. It's not a "sexy" vacation, but spending that money to make some memories might be the best investment.
The most important thing to remember is not to get conned into going on a trip you can't afford. You won't be too relaxed if you know that trip is going to leave you in debt.
A shiny new set of wheels
Some of you may be drooling over the latest fad from Motor City, or maybe the new import on the showroom floor has caught your eye. Once again, purchasing a car can be a good use of your refund and rebate (still in line with the spirit of the economic stimulus package), just be smart.
While that car that can do 0-200 MPH in 3 seconds, or has a phone, a coffee maker, and a wet bar, might look like a dream come true, being saddled with a car that is showy but useless, can be a nightmare.
Find a car that meets your needs. Notice I said NEEDS and not WANTS. While your wants can be important, don't drag yourself into debt for a bunch of fancy extras. Make sure that the car meets the basic needs of space, durability, gas mileage, and some of those psychological needs (hey go for the leather seat covers). If you are a soccer mom with 4 kids, that two door Mustang probably isn't going to be a good investment.
Make sure that you also choose a car that you can afford. When you make the average wage (usually around $40,000 a year), going for that $250,000 Lamborghini is probably not a good idea. You should review your income to make sure you can either afford to outright purchase the car, or that you will be able to reliably make any payments required under financing. You don't want to buy a car and then find the repo man towing it away a few months later.
Research your financing options. While I would usually argue that you shouldn't buy a car you can't pay cash for, I realize that sometime that isn't possible (whether that is due to emergencies or simply a lack of funds for those who are just starting out). Make sure you understand all the options for payment. Often dealers will offer in home financing, which can be a good deal, but check the rates form your local bank or credit union.
Also look into dealer rebates, or other rebates you may qualify for due to your status (some dealers or manufacturers may offer special rebates for veterans or active duty military service members). Compare the cost of buying the car off the lot, or financing it. Sometimes it can be a close call, but make sure you've reviewed all the options.
Realize that the car will be worth 5-15% less than the purchase price the minute you drive it off the lot, so don't expect to be able to sell it for what you paid. Also, check the dealer policies on returns. Some dealers offer a 72 hour return policy, some do not.
Consider buying a used car. Some great places like CarMax.com offer a wide selection of used cars. With CarMax, they have generally thoroughly inspected the vehicle, cleaned it, and made sure it's in good shape. Used cars have already depreciated in value, so your immediate (driving off the lot) loss in investment value is much less.
With either new or use cars, make sure to get information on the manufacturer's warranty or dealer warranty for service and repair. Sometimes even new cars can have serious mechanical issues, and you don't want to dig yourself deeper in debt fixing it up.
Also, make sure to review your insurance costs. Buying a new car will likely raise your insurance costs, especially if you opt for comprehensive and collision coverage (which will help to replace the car in case of an accident). Call your insurance company and ask for quotes based on the make and models you are looking at. Compare the costs for both used and new vehicles (used cars will likely have a lower insurance cost), and factor insurance premiums into the overall cost of the vehicle. You'll also need to consider the cost for registration of your new ride in your local jurisdiction, some areas require you to pay registration fees based on the age, make, model or gas usage of your vehicle.
Keep the gas mileage of the car in mind as well. In the current era of skyrocketing gas prices, buying the fuel efficient hybrid (like the Toyota Prius), might be a better idea than the monster Hummer.
Get rid of the shackles
Getting out of debt can be a great way to spend those new found funds. It is usually a better idea to pay off your highest interest rate debt first (likely to be credit cards or car loans). Even if you have smaller debt amounts at lower interest rates (such as $1000 at 5% versus $5000 at 22%), apply those funds to the higher interest rates. It will be more effective, and save you more money in the long run.
Also evaluate the status of the debt. Some debt is considered "good" (such as home loans and student loans), and doesn't necessarily reflect negatively on you. Some debt is considered "bad" (such as high interest credit card debt), and can negatively impact your credit ratings or ability to get loans.
If you are lucky enough to not have credit card debt, or car loans, or student loans (or some other form of financial shackles), consider putting the money towards your home. If you own your own home, consider making an extra mortgage payment (or two), to cut down the principal. If you haven't bought a home yet, consider putting some of that (or all of that) money aside for a down payment.
You may want to consider consolidating your debt into one place (usually a HELOC or onto one credit card). Consult a financial advisor to determine what might be best for you.
Saving for a rainy day
Now might be the time to start that rainy day fund. Most financial experts recommend that you have at least 3-6 months of your living expenses in an emergency fund. Calculate what you would need to have to survive (pay all your bills, utilities, rent, food, car fuel, etc) for that time frame, and then put that money aside in a savings account.
If you are already on the ball and have your emergency fund, start another fund for college, a new car, a new house, or whatever else you might want to buy in the near future. Save that money up so you can pay for the item outright, or in the case of college or a home, you can let that money sit there and grow.
Look at putting some of that money into a retirement account, such as a Roth IRA or employer sponsored 401(K). It is never too soon (or too late) to start saving for the future. Make sure to research your contribution and income limits. Research the options to make sure you are getting the best bang for your buck, and the best tax savings for the future.
You may simply want to put the money away to grow. Consider a high interest savings account (available from INGdirect or other online banks), CD, or brokerage account.
Other Options
There are plenty of other ways to spend your money: a shopping spree to the mall, that new plasma TV, a new computer, a pet, or the newest gizmo to make life easier.
Whatever you decide to buy, consider a few things.
1. Do you need the item? Is this something that you will use or need, or will it simply acrue dust in the attic/basement?
2. Is this the best price? Compare items, and retailers, to make sure that you are getting the best price. If it is a seasonal item, consider waiting until it will be on sale.
3. How long will the item last? Is this a long term investment, or a short lived high?
4. Have you met all of your financial obligations?
5. Can you afford it?
Tax rebate time can you give you a high, but don't let that high leave you broke, or in more debt than you had before.