Tuesday, January 29, 2008

Options For Our Tax Rebate - Reduce Debt Or Save

I know the proposed tax rebates are designed to encourage spending to help the economy. However, I consider the tax rebate a windfall that we can use to help build our wealth. Here are five options we will consider for our rebate:

  1. Pay down debt. Our only debt is our home mortgage. The tax rebate could be used to pay down principal and accelerate the pay off of the loan. If we had credit card or other consumer debt, we would pay against those amounts first.

  2. Put in tax deferred savings. The tax rebate can help fund our IRA accounts. We've already made our 2007 contribution. The rebate would give us a head start on our 2008 contribution.

  3. Add to college savings accounts. We have been making regular yearly contributions to our three year old's college 529 plan. Since we have already made the 2008 contribution, we could put the tax rebate towards the 2009 contribution.

  4. Increase savings for a future purchase. We prefer to pay cash for our major purchases, by saving the money and paying lump sum. We have a couple of home improvements for which we are saving. Also, we will likely replace a car in the next five to ten years. The tax rebate would accelerate reaching our savings goal in these areas.

  5. Boost general funds. Since we retired in our forties last year, we no longer have a separate emergency fund and expense fund. It is all one general fund, and we keep short term needs (e.g. about three years) in cash, bonds or CDs. If we were still working, I would add the tax rebate to our "emergency" funds.

Our goal will be to avoid the "impulse purchase." I'm sure there will be a lot of "tax rebate" sales in May, 2008. Flat screen HDTVs, new cars or car leases, and vacation packages will all be competing for the tax rebates. Unless the item is already in our plans, we won't be spending money on it.

For more on Ideas You Can Use , check back every Tuesday for a new segment.
Photo Credit: morgueFile.com, Jane M. Sawyer

This is not financial advice. Please consult a professional advisor.
Copyright © 2008 Achievement Catalyst, LLC


Frugal Dad said...

We plan to pay down debts and set a little aside to beef up our emergency fund, probably a 70/30 split.

triplemom said...

Love your blog! I am so happy to see some people living the "early retirement dream".

You say you have already put in your 2008 contribution in the 529 plan. Is there a limit?? Or is it just that you have put in the amount that you PLANNED to contribute? We are currently saving for our three young children.

Super Saver said...

@ Frugal Dad,

Thanks for sharing your plans for the rebate. Hopefully, the bill will pass quickly and the rebate will happen by May.

@ Triplemom,

Thanks for the complement.

Our plan is to contribute the maximum amount that can be deducted on our state tax return each year. (For reference, a number of states allow deductions for 529 contributions to their own state plans.) Contributing more is allowed, but we would need to wait for future tax years to take the deduction.

Our contributions are theoretically limited by the total 529 account value limit. Once an account reaches the maximum allowed (currently over $200,000 for us), no further contributions can be made. We won't have to worry about this limit for many years:-)