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Get the Most From Your Tax Rebate

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Liz Pulliam Weston, the #1 Online Personal Finance Columnist, helps you determine the right mix of saving and spending for your tax rebate.
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Congress wants you to spend the economic stimulus checks the IRS will start sending out in May. But that doesn't mean you must.

Most households will receive the checks of up to $600 for individuals, $1,200 for couples and $300 per child. To receive a check, people must have at least $3,000 in income and have filed a 2007 tax return. The IRS has a calculator on its Web site so you can estimate how much your household might receive.

Polls show that many Americans plan to save the money or use it to pay down debt, and those may be the smartest choices for you as well. Here's how to decide:

Got credit card debt? Pay it down. Credit card debt is toxic for your financial health. It's expensive and the balances you carry cut you off from credit you may need in an emergency. A family of four could save nearly $300 a year in interest charges if they used their $1,800 rebate checks to pay down credit card debt that's incurring 15% interest charges. And since most families don't have sufficient cash savings, freeing up space on a credit card can be invaluable when there's an emergency.

Savings depleted? Build up a cushion. If you don't have credit card or other high-rate debt, check your bank account balances. You should keep a pad of a few hundred dollars in your checking account to help prevent bounce-check fees of $25 to $40 each. Putting some money in a high-rate savings account can allow you to pay cash for the next unexpected expense, rather than having to charge it to your credit cards.

Savings okay? Focus on your retirement. Think $600 won't get you far in retirement? Not so. That amount invested today could grow to more than $6,000 in 30 years, assuming 8% average annual returns. If you're already contributing to a 401(k) or other retirement plan at work, consider investing the money in a Roth IRA. There's no tax deduction for contributions, but withdrawals are tax-free in retirement. If you don't have a retirement plan at work, you can fund a traditional IRA and deduct your contribution. If you're in the 25% tax bracket, that $600 contribution could save you $150 in taxes next year.

Finances in good shape? Then buy American. If you do want to splurge a bit, consider buying a product or service made in the good old U.S.A. Since your money stays here, it will do a lot more good for the economy than if you were to buy, say, a plasma TV or other product made in another country.

Or take a (local) trip. Studies on happiness are consistent: we get more lasting pleasure from memorable experiences with our family and friends than we do from purchasing stuff. As long as you don't leave the U.S., your tax rebate windfall can offer a getaway that helps you, your family and the economy.

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