Make your stimulus cash last longer
Special to the Star-Telegram
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Whoopee! A new flat-screen TV.
That's the reaction of many taxpayers to the economic stimulus payments that are showing up in bank accounts and mailboxes now through mid-July. And the government applauds that reaction. Getting Americans to spend, spend, spend and boost a sagging economy is the whole idea behind the checks.
But it's not written anywhere that the 130 million households that will be receiving stimulus checks must use their money to splurge.
In fact, personal finance experts such as Kimberly Lankford of Kiplinger's Personal Finance magazine say the checks are a rare, pain-free opportunity to boost your long-term financial status.
Here are seven money-smart things to do with your economic stimulus payment.
Pay down credit card debt
1 Kristie Leatherberry, branch manger of the Dallas/Park Cities office of investment company Charles Schwab, says the first thing the company recommends is paying down high-interest credit card debt.
If you have a $5,000 credit card balance and a 15 percent interest rate and you're paying $100 a month, you're going to pay approximately $2,600 in interest before eliminating that debt in six years, Leatherberry says. If you apply $2,100 (the amount a married couple with three children younger than 17 might receive) to that debt, you'll cut the time it takes you to pay off that debt in half and save about $1,900 in interest, she says. "We always advocate paying down those credit cards first," Leatherberry says.
Start a rainy-day account
2 If you've been careful with your credit cards and don't have credit card debt, the next thing to do is set up an emergency fund, Leatherberry says. Every household should have money set aside to cover three to six months' worth of regular expenses, in the event of an emergency such as illness or loss of a job. Funds in a money-market account can be accessed at any time, and a three-month CD is relatively liquid.
Boost your 401(k) contributions
3 Kiplinger's columnist Lankford's No. 1 suggestion is to boost your 401(k) contribution for the year, particularly if you have not reached the maximum employer match amount.
For example, if you receive a stimulus check of $1,200 and you are in the 25 percent income tax bracket, you can increase your 401(k) contributions for the year by an amount that equals $1,600. And you'll have the same amount of spendable income. "That's because your contributions lower your taxable income, so investing $1,600 lowers your take-home pay by only $1,200," Lankford says on Kiplinger.com. If your 401(k) investment earns 8 percent, in 30 years that extra $1,600 will have turned into $16,000.
Even better, if your employer matches your 401(k) contributions at 50 percent and you haven't reached the employer match maximum, you would be turning your $1,200 check into a $2,400 401(k) contribution (you boost your contributions by $1,600 and your employer adds an $800 match), which will increase to $24,000 in 30 years, Lankford says. Way to save!
Contribute to an IRA
4 Lankford and Leatherberry suggest an IRA, either a traditional IRA or a Roth IRA, if you've maxed out your 401(k) contributions. Money contributed to a traditional IRA can be deducted from your taxable income for next year, while on a Roth IRA you will not pay taxes on interest earned when you withdraw the money.
If your economic stimulus money is in an IRA for 30 years and you have an 8 percent rate of return, it could grow to 10 times its original value, Leatherberry says.
Contribute to a 529 college savings account
5 Leatherberry says the next thing Schwab would recommend is a little college planning. Texas offers a state-sponsored 529 plan that's similar to a Roth IRA. Your contributions are not tax deductible, but you pay no tax on interest earned when you withdraw the money as long as you use it for a qualified education expense, such as tuition, books or a computer.
If a family contributes $1,200 to an account for a toddler, the money could grow to $4,000 by the time that child is 18, Lankford says.
Start a Roth IRA for your teenager
6 Teens who work are eligible to open Roth IRAs equal to the amount of money they earn or $5,000, whichever is the lower number. The money does not have to come out of the teen's pocket; you can use your economic stimulus money to fund the IRA.
Teenagers, because they will not be using IRA money for years, can really see the money grow. An 18-year-old who invests $1,200 in a Roth IRA earning 8 percent will have $44,000 in tax-free money when he is 65.
Take advantage of retailers' special offers
7 If you absolutely must spend your economic stimulus money -- if now is that rainy day in your life, for instance -- you can boost its purchasing power by taking advantage of special offers being offered by a number of retailers.
Kroger stores, for example, are offering a 10 percent bonus on the purchase of gift cards for $300, $600 or $1,200 up to $1,200 total. Pay $300, for instance, and get an extra $30 added to the gift card's value. Tom Thumb, Sears, Supervalu and other stores are offering similar programs. Check around where you shop.
