3 Things to Do with Your Rebate Check

by Kevin on April 30, 2008

Refracted Moments

(Photo by Refracted Moments)

Yesterday we discussed why the government thinks giving you and I “free money” is a good idea. Today, I’ll show you three superior alternatives to spending that money on a flat-screen TV.

Pay down your debt

This is by far the absolute best thing you can do if you currently have debt. Spending this money is good for the economy, but you going bankrupt isn’t helping anyone. The faster you pay down debt, the faster you will be free to do as you please with your finances (to a point, of course).

Let’s say you have credit card debt at an interest rate of 14.9%. Your principle amount is $10,000 and you pay $200 per month towards your principle and interest. If you just paid $200 each month, it would take 78 months (six and a half years) to fully pay it down. You will also pay $5,717.39 in interest, or 57% of the original value of whatever you charged on your credit card.

If you pay down the principle with your $600, you will finish payments in 70 months and only pay $4,798.60 in interest. Interest saved? $918.79.

Start or Continue Saving

You need to have an emergency fund for those rainy days where you go to bed thinking “What else could go wrong?” Having money saved up for those days when everything goes wrong — your transmission dies, the cat needs surgery, and your washer started leaking heavily.

Use this rebate for that purpose. Open up an online savings account — we used to call them high yield until all of the rate cuts slashed interest rates down to pitiful levels — and don’t touch the money until you absolutely have to. I recommend ING Direct. If you already have an emergency fund saved up, start saving for that next big purchase like your next used car or the down payment on a house.

Even though the fed is going to cut the rate today and online savings account isn’t a bad place to have the money. I prefer savings accounts to CDs because if you are just getting started with saving it makes the money accessible for when you do have an emergency. You don’t sacrifice interest with a savings account. If your funds were in a CD — well, most CDs anyways — you have to give up 30, 60, or 90 days of interest if you pull the money out before the maturity date. Savings account general accrue interest daily, and there is no penalty for withdrawing some or all of the funds.

Start or Continue Investing

If you’re to this option, congratulations. You should be living debt-free and you’ve saved up an emergency fund. Maybe you’re just getting to this stage. Maybe you’ve been investing for the past ten years. Either way $600 may not seem like much.

However, invested in a broad diversified portfolio that earns just 8% for 30 years that $600 turns into $6,037. Earn 12% annually and you end up with almost $18,000.

Stick that money into a Roth IRA and see what happens when you retire.

Long Story Short

The government wants you to blow the rebate check on things that will boost the economy. They want you to spend, spend, spend. Don’t buy that. Use this “free money” as an opportunity to get speed up your No Debt Plan. If you’re still in debt, pay it off. If you have no debt, build an emergency fund or save for something else. If you’ve done all of the above, then consider investing it.

It’s all about the mentality where any extra money that comes in — tax rebates, bonus checks, or raises — doesn’t lead to lifestyle inflation. It isn’t easy, but it is worthwhile.

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