No Debt Plan

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(Photo by mdid)

Frustration mounts.

With all the rah-rah celebration around the tax rebates, I was actually looking forward to getting ours. We filed our taxes electronically so we should be receiving our “free” money electronically. I want to get it not to go out and buy a TV (although that would be nice), but to bolster our emergency fund. We talked about the tax rebate twice last week.

No matter how I feel about the overall impact of the checks — I still want mine. Everyone else is blogging about getting theirs… where’s ours?

We filed together, and both of our social security numbers fit into the middle tier for electronic filing. That means our rebate should have been processed by May 9th, this past Friday. (You can see more about the tiers over at Consumerism Commentary.)

But nothing has shown up in the bank account that we paid our taxes from. Zip. Zada.

Frustrating.

I’ve also heard that it can take up to two weeks from the transmission date for it to hit your bank account. That seems odd; it’s all electronic.

As they say, you can’t lose what you never had. I suppose that’s true — but this is something technically I should have! I feel like we’ve lost it.

I think the real issue I have with it is I am fearing having to call the IRS to try and figure it out. We’ll give it a few days before resorting to that.

A quick poll: I’m curious… anyone else out there expecting the tax rebate and haven’t received it yet? Especially if you filed electronically?

(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.

(Photo by Fleur-Design)

Starting this week, millions of Americans will be receiving tax rebate checks ranging from $600 to over $1,800 depending on how many kids are in your household. The government is hoping that you and I will take those ‘free’ checks, run out to Best Buy, and buy a LCD flat screen television. Today I’ll discuss why the government thinks that is a good idea. Tomorrow I’ll tell you what we’re doing with our check, and show you options of what you can do with yours.

Why does the government want me to spend $1,200?

I’m currently enrolled in an economics class in my MBA program. We discussed the rebate checks during the macro economics portion of the class. I will try not to get too technical and leave things easy to understand. For you economists out there, cut me some slack as this isn’t a lecture!

In an economic sense, any economy’s output runs off of these three things: consumer spending, investment, and government spending. Consumer spending is where you and I spend our hard earned dollars. It is affected by taxes and income (higher taxes or lower income = less spending = less output, and vise versa). Investment isn’t the type of investment you and I discuss regularly. This investment is capital investment. In a business sense, building factories, buying equipment, etc. Government spending is… where the government spends money.

Increasing spending in any way induces varying levels of a multiplier effect, dependent on what the increase was based off of.

For example, imagine the government decides to repave every single interstate in the country. They borrow (or tax) money, and jobs are created. Perhaps a new department is formed, which employs people. Workers are brought in to do the repaving. They earn money, and spend it in the grocery, video game, and hardware store. Those stores employee people, who get to keep their jobs and earn money because of the spending of the repaving workers. They go to the grocery store… etc.

As I mentioned earlier, consumer spending is affected by income and taxes. The rebate checks are essentially a form of lowering taxes by giving money back to the population.

All of this hinges on the marginal propensity to consume…

What is the marginal propensity to consume (mpc)? Essentially it is how much of every discretionary dollar you will go out and spend. If I gave you $100 and you would normally spend $95 of it, your mpc is 0.95. So mpc is on a scale of 0 to 1.

Right now America’s mpc is very high. We are spending more than we are earning and end up with a negative saving rate. Our mpc is very close to 1.

So, the government is trying to boost the economy by giving you and I some extra money. An equal amount of boost could be given by increasing government spending, but tax breaks are far more politically popular. Because our mpc is so high as a country, if most people spend the money then the economy will be given a boost.

That’s a big if…

If America becomes fearful of a recession and instead saves a majority of the tax rebate, it will be a lot less effective. This would bring down mpc (at least for this transaction); the lower it falls, the less boost the economy gets.

So if you want to be a proud American, play along with the government and go spend that check. If that just doesn’t seem right to you, stick around.

Tomorrow I’ll show you how to be a smart American.

Many bloggers out there are sharing tales of asking for extensions or finally successfully filing their taxes today. That, or they are sharing stories from the mainstream media or even their own readers.

(Photo by The Consumerist’s photostream.)

I don’t want all that grief.

We did our taxes back in March. We owed money, and made the payment then anyways. We could have scheduled the payment for today, but that would leave a task ‘undone’ in our lives. We would earn a few cents of interest, but there is a good possibility I would fret until that payment came out. I don’t want to cross the government. No thanks. Paying up front let me know that everything was good to go and I can move on with our financial life.

I was actually really hesitant to write this post. I wanted to avoid discussing taxes today. Peer pressure. “Everyone else is doing it…”

What about you?

Did you wait until today or this past weekend? Do you enjoy the pressure or did you not know where the money was going to come from?

Or did you get it done early in tax season just to be done with it?

Well I just finished up our taxes on Saturday afternoon. The damage isn’t too bad as far we are concerned. We owe the federal government just over $500, and Alabama owes us about $375. Don’t ask me how it got that way, but that’s what TaxAct came to. Net result: we owe $125. Thankfully, we had socked away $1,500 “just in case” for taxes.

We had several life changes in 2007 that affected our taxes considerably:

• We got married in January.
• We bought our first house in September.
• My wife graduated in May and started her teaching job in August.

I told my wife to work her W-4 so as little tax as possible was withheld, within reason. I would rather owe $100 than get $1,000 back. She told the HR department this and they said they would take care of it. Result? We don’t know what exemptions they put down and she is being under withheld greatly. A simple mistake that can cost you big at tax time. Thankfully, it is a simple fix. We will make an adjustment to that this coming week so we don’t owe more next year. Owing too much can result in penalties and nobody wants that!

Are you ending up with a massive refund this year? The same in years past? Stop loaning the government money interest free. You can make withholding adjustments at any time during the year. Plus it increases your take home pay! As long as your diligent with the money, you end up better off. Granted, some folks know themselves well and decide not to do this. They fear they will blow the extra money. That’s understandable. However, here is what I would do if I got a huge refund two years in a row.

1. Print off a new W-4 form (PDF) and make adjustments to my withholdings so more tax is taken out each week.
2. Take my large refund amount and divide it by 52 weeks. This tells me how much money I should save each month to get the same result. Example: A $1,000 refund would be $19.23 per week.
3. Open up an ING Direct savings account and set up automatic weekly withdrawals of $19.23.
4. End up with $1,000 plus all of the interest earned over the year (of course, minus income taxes on that interest as well).

Alternatively, you could look at your next paycheck and see what the difference in take home pay before and after comes out to. Take that difference and save it.

Especially if you are in debt, increasing your take home pay can be huge. Sure you can apply your refund to the debt, but the entire last year you would be paying interest on the debt while also giving out money for free to the government. That is some seriously bad math. An increase of take home pay of just $12.50 per week would be a plus — that’s another $50 towards debt. You could save a ton of money in interest.

I would also monitor my withholding with the IRS’ Withholding Calculator. I was impressed with this tool from the government. You input data from your pay stubs, the previous year’s tax return, etc. and it tells you if your current withholdings on your paycheck are on track. If they are seriously out of alignment, positive or negative, you get a heads up that something needs to change. Notice a problem in March and you’ve got a lot of time to make changes. Notice it when you are doing your taxes next year and you are out of luck.

In short, taxes are part of life. Refunds don’t have to be.

I’m in the midst of doing our taxes online. We’ll see how much we owe Uncle Sam. I had a good experience last year with TaxACT Online. We have some complicated investment schedules that had to be included, and most online sites did just basic 1040 forms.

Here’s to owing as little as possible!