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Spend Your Stimulus Payment Wisely

May 2008

Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers NJAES Cooperative Extension

Starting this month, many people will receive an economic stimulus (rebate) check. To qualify, you must have received benefits or earned income of $3,000 or more in 2007. Even if you did not owe taxes, you must file a tax return to receive a rebate check. If you earned more than $3,000, but paid no taxes, you will receive $300. If you made more than $3,000 and paid taxes, you will receive $600. And if you have children under 17, add an additional $300 per child. A single person will receive a $600 check and a married couple will receive $1,200.

However, if a taxpayer’s income is more than $75,000 ($150,000 if filing a joint return), eligibility for a rebate phases out. The IRS has created an online calculator to help taxpayers determine if they are eligible at Basically, the phase-out formula works like this: stimulus payments drop by 5% of the income above the threshold -- for example, $50 for each $1,000 over the amount. For example, suppose a couple with no children has a 2007 adjusted gross income of $150,000. In this case, they would qualify for a full stimulus payment of $1,200. But if their income for last year was $174,000, they wouldn't be eligible for any payment because they were $24,000 over the phase-out threshold ($174,000 minus $150,000). Multiply $24,000 by 5%, and the answer is $1,200. Subtract that from the payment amount of $1,200, and you get zero.

The IRS will use Social Security numbers to determine the order of payments and expects to send 34 million payments by the end of May. Since rebates are based on 2007 tax return information, those who have a tax return extension will have to wait until their returns are filed to get their checks. Legislators who voted for the economic stimulus package are hoping people will spend this payment and boost the economy. Toward this end, appliance stores, car dealers, furniture stores, retail stores, and other businesses will be encouraging consumers to use economic stimulus payments toward purchases of their products.

What are you going to do with your money? Sit down together with your family and prepare a plan before you receive your check. It’s a proven fact that managed money goes further. For example, you may decide to use 75% of the money for practical purposes and the remaining 25% for enjoyment or to make a special purchase. Dr. Carolyn Bird, Family Resource Management Extension Specialist at North Carolina State University offers the following suggestions for managing your stimulus payment and tax refund money:

Pay Down Debt - Paying down outstanding balances will save you money on high interest rate debt. Debt can be hard to pay off when only making minimum payments because the majority of the payment goes toward interest. The stimulus payment provides a nice chunk of change to apply toward reducing the amount owed.

Fatten Your IRA - Even a modest IRA deposit can have a substantial impact on your retirement account. Increasing any one (or more) of these four components (initial deposit, regular monthly deposit, average interest rate earned, and length of time to retirement) can increase an account balance significantly over time.

Prepare for the Holidays - Make an additional deposit into your Holiday Club savings account or open a new one. Then regularly make additional deposits over the coming months. Whatever you save in this account will go a long way toward avoiding credit card debt during the upcoming holiday season.

Save for Emergencies - Open an emergency savings account to provide easy access to funds to take care of unexpected events. When the tire goes flat, the car battery needs replacing, or the washing machine goes “ping,” money in an emergency account will let you pay for these expenses without using credit.

How you choose to use your stimulus payment is an individual or family decision. Take the time now to develop a plan that will benefit you financially. There’s nothing wrong with saving some of this money, or paying off debt, or spending some of your payment, or all three. It’s your money, so make the most of it.