Many New Jerseyans recently received a double windfall: state property tax relief checks (NJ SAVER Rebate or the Homestead Rebate), as well as a federal tax rebate (technically called an "advance payment" by the IRS because it is reflects the newly-created 10% marginal tax bracket). Single taxpayers received up to $300 and married couples, up to $600, from the federal government. Together with a state property tax relief check, some New Jersey households received over $1,000.
So what did you do with your federal and/or state money? A survey on the Web site Kiplinger.com found that only 22% of respondents planned to spend their federal tax rebate compared to 50% that planned to save or invest it and 28% who planned to pay off debt. Similar results were found by an ABC News/Washington Post survey that found 21% of their respondents planning to spend their rebate.
Below are several ideas to consider for your government rebate(s) if you still haven't decided what to do with the money. These ideas can also be implemented with any lump-sum payment such as retroactive or overtime or bonus pay, insurance dividends, or regular tax refunds.
First, there is probably no better "investment" of $1,000 than to repay high-interest consumer debt (e.g., outstanding credit card bills). Paying off an 18% credit card is equivalent to earning a 25% return for a person in the 28% tax bracket (18 divided by 1-.28 (.72) = 25). That's because you'd have to earn a 25% return to be left with 18% after taxes. Unlike investments, like stocks and bonds, the amount that you'll earn by repaying debt is guaranteed and tax-free.
If you have no outstanding consumer debt (congratulations!), consider investing your tax rebates. A number of low-cost investment alternatives are available, including mutual funds that require $1,000 or less to open an account and hundreds of stocks with direct purchase plans (check the Web site www.netstockdirect.com). In addition, U.S. Treasury securities (bills, notes, and bonds) are available in $1,000 increments, as are unit investment trusts and corporate bonds.
Don't think a $1,000 investment will really matter? Think again. With an 8% return, your money will double in nine years according to the Rule of 72 (72 divided by 8 = 9). At the end of 20 years, your one-time $1,000 investment will grow to $4,660. Check the Investing For Your Future home study course on the Web site www.investing.rutgers.edu for additional investment ideas, especially Unit 8 on investing with small dollar amounts.
You could also use $1,000 to fund half of your 2001 IRA. Check the calculators linked to the Web site www.rothira.com to determine whether a traditional or Roth IRA is a better choice based on your age, planned retirement date, and marginal tax bracket. You are allowed to contribute up to $2,000 maximum 1n 2001 to any IRA or combination of IRAs. In the years 2002-2004, the maximum IRA contribution amount will increase to $3,000. It will rise again to $4,000 from 2005-2007 and eventually rise to $5,000 in 2008 and later. After that, it will be indexed for inflation in $500 increments.
Another good option is to invest in yourself or, as economists like to say, "build your human capital." Take a course or other job training experience to improve your knowledge and skills. It could eventually lead to a raise or promotion and pay back your tuition payment many times over. Two good places to continue your education are county community colleges and professional or trade associations related to your occupation.
Tax rebates can also be used for home improvements. In fact, several large home supply companies have encouraged this. Generally, people see the most "payback" for their home improvement dollar when they improve their kitchen and bathroom.