Free From Broke

A Personal Finance Blog for Regular Folks

Glen Craig

Will The Economic Stimulus Payments Have To Be Paid Back

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Will you have to pay the Economic Stimulus back?

Now that many have already received their economic stimulus payments, and have figured out what to do with it, I’m seeing a lot of questions asking “Will the stimulus payment need to be paid back?”

The quick answer is no. According to the IRS the economic stimulus payment is not taxable and will not reduce what you may be owed in a tax refund for 2008 (filed in 2009). In fact it’s possible that you get more back next year, if you didn’t already get the maximum, based on next year’s return. See the amount was based on your 2007 return so if you didn’t qualify for the full amount you may still qualify for the difference based on your 2008 return. Don’t worry if you received the full amount already. No matter what your 2008 return says you won’t have to pay anything back.

Now the the longer answer – You are going to have to pay back the economic stimulus payment! In some way, shape, or form we will pay that back. The money has to come from somewhere.

Let’s look at the ways in which the gov’t receives income:

  • Taxes (from income and corporate taxes).
  • Loans (in the forms of government backed securities such as bonds, bills, and notes).
  • Printing more money in the treasury.

Which do you think the money will come from? Printing money sounds like an easy way to find the dough but it’s not a policy the US uses due to the fact that more money creates inflation (Inflation is always and everywhere a monetary phenomenon – thank you Milton Friedman). And who wants even higher prices?!? We can issue more loans. Did you know that in 2006 we paid $406 Billion in interest payments on loans made to cover the national debt? Where does that money come from? See above. So that leaves us with taxes.

Yes, I believe we will be paying back the economic stimulus payments in the form of taxes. It may not be as one lump sum like we received it but it will be paid out. It’s just lumped together with the rest of the national debt.

Could this be avoided? Maybe. But only if the national debt, which is over $9 Trillion, is reduced to zero in our lifetimes. This would mean that government would have to cut back it’s size and spending. Most likely many programs that help people would fall victim to the cuts. I’m not saying it’s impossible for this to happen, just improbable. I hope I’m wrong.

Of course another way to look at it is it won’t be us but our kid’s generation that will pay it back. I’m not too sure that’s a positive spin on it though.

So there you have it! Do we have to pay the economic stimulus payments back?

No, but yes.

What do you think?

Update: There has been a lot of confusion over paying the Economic Stimulus Payment back.  Please read Paying Back the Economic Stimulus – Lots of Tax Confusion for more information and clarification!

photo by Refracted Moments

Buy That Fun Stuff Without Going Into Debt

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Cash Register

You want to buy that new something.

Maybe it’s the Nintendo Wii and the Wii Fit?  Maybe it’s a new digital camera?  Perhaps it’s a new flat-screen TV or a GPS?  You can’t afford to buy it out-right.  If you charge it to a credit card you will be paying interest on top of the price of the item.

What if there was a way to buy the item and earn interest?  What if we can help make sure you buy it at a great price?

Sounds interesting right?

I’ll tell you what we’re going to do.  First off I have to tell we’re going to wait to buy this item.  Bummer I know.  You want it now.  But you don’t have the cash and paying interest on it, as well as being in debt, isn’t a great option.  Deal with it.

We’re trying to be responsible here and still get our new thingamajig.

Do you have an online savings account that allows you to create sub-accounts?  Good.  Now go into your account and create a sub-account titled Thingamajig (or whatever it is that you want to buy).  This is where you are going to save your money.

Now what amount of money can you put away into this account monthly without hurting your budget?  Can you cut back on Starbucks or something similar every week?  What would you expect to pay on your credit card if you charged it?  That’s a good amount to start with too.

Figure out how much a week this comes out to.  Go back to that sub-account.  We’re going to set up an automatic, weekly withdrawal into this account.  Why weekly?  This way you can see the money building up quicker.  I don’t want you getting impatient waiting for a monthly addition to the account.

Now we wait until the account fills up with the cost of your thingamajig!  This can be tough as you’ll test your patience but it will pay off.  Resist cashing out until you have the full amount to cover the purchase (you calculated taxes, accessories, possible warranty, delivery, etc…into your cost already, right?).

Here’s where this plan is great:

  • You earn interest while you save! – Every month you save you’re helping yourself with the interest you are earning rather than paying a credit card company interest for the privilege of using their money!
  • You now have time to do research – Go check out the thingamajig in a few different stores and ask the salespeople about the item. Go online and read consumer reactions. Check everyone’s price and see what locations give you the most bang for your buck (do some throw in accessories or have better return policies should something not work?).
  • A new improved model may come out – In the time you’re saving you may find that a better version has come out. Maybe the first was discontinued. Technology changes rapidly. today’s top of the line cell phone could be a clunker after a little while. It could be another company now has a better product.
  • The price could drop – Look at that. Now the thingamajig isn’t even as expensive as it was. You’ve earned interest and saved on the cost!
  • You may find you don’t want it anymore – This may sound crazy but in giving yourself some time to save and watching your savings grow you may not feel the thingamajig is worth the money anymore. Maybe it was just a fad that’s already faded? Either way, you now have a little extra to add to your savings. Sweet!
  • You became more responsible with your money – You didn’t go into debt buying your thingamajig. You set up a savings plan and stuck to it. You might have even looked at your expenses and found some things you didn’t really need in order to save quicker. What you were saving is now extra savings for you if you choose after you buy your thingamajig!

There you go!  You got your thingamjig, you didn’t go into debt, you earned interest to help pay for it, and you got the best possible price for it.

I bet it’ll feel good when you get home and open it up!

photo by skippy13

Five Things Indiana Jones Can Teach Us About Personal Finance

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Indiana Jones Lego

I saw Indiana Jones and the Kingdom of the Crystal Skull (among all the prior movies).

Was it as good as Raiders of the Lost Ark?  How many movies are?

Was it a lot of fun to watch? Absolutely!

I got to thinking about ‘ole Indy.  What makes him successful in his movies?  What is it about him that keeps him coming out ahead?  And can those qualities be translated to personal finance?

Here are five things I think Indiana Jones can teach us about personal finance:

Indiana Jones doesn’t need a lot of stuff

When he goes off on an adventure he has a few items: His whip, hat, jacket, side bag, boots, pants, shirt, gun holster, and notebook.  This is basically his adventure “uniform” and it doesn’t change.  Indy makes do with what he has and makes his stuff last.  Ever see him buy a new hat?  How about shiny new boots?

How this translates for us: Find out what you need in your life.  Note the word “need” and not want.  Don’t clutter your life with stuff.  Stuff takes up space and uses up money. Also it usually pays to buy quality when you can. If you take care of a good item it can last many years (like a trusty fedora hat).

Indiana Jones has focus and persistence

When he has a goal he goes after it with all of his focus until he can’t continue any more.  Do Nazis stop him?  Angry cult member?  Communists?  Even his enemies recognize this quality in Indy.  Think of the times he’s been caught, kidnapped, or blackmailed into helping the enemy.  Indiana Jones is the go-to guy if you want an artifact found.

How this translates for us: Create personal finance goals and stick to them.  Are your goals worth fighting for?  Will you retire?  Will you be financially independent?  Develop persistence and focus to stay on track with your goals and complete them.

He’s daring, brave, and well educated

There’s times where Indy is doing some crazy things (climbing into an archaeological dig surrounded by Nazis anyone?).   What keeps Indy afloat when he goes off on a daring adventure?  Luck has a bit to do with it.  But it’s his education that tempers bravado. R emember, not only is Indiana Jones an adventurer he’s also a doctor of archeology that teaches at the university level (and a Boy Scout).  A big part of why he’s successful in his adventures is because he’s already done extensive research on what he’s going after.  As wild as he sometimes seems he doesn’t blindly go off looking for adventure.  He’s put years into learning his subject.

How this translates for us: Don’t blindly make investments or make purchases without out doing your homework first.  Educate yourself about personal finance.  Keep learning.  Know why you are putting money into an investment and understand what the risks are going in.  When making a major purchase study up on different brands and their reliability and consumer responses.  Try to find the best value and price (maybe you can pick up a really good hat).

He carries a notebook full of information

We see Indy go back to small notebooks all the time.  Whether it’s looking up a map or deciphering a language, he keeps notes on all his research.

How this translates for us: Keep your own notebook.  Track your expenses to see where your money is going.  Keep notes of things you did that saved money.  Make to do lists to stay on top of your life.  Write out grocery lists so you only buy what you planned on.  And these days there are so many apps out there for notes that you can’t use not wanting to carry a notebook as an excuse.

He tries to do the right thing

There are many times Indy can get quick cash by obtaining an artifact and selling it.  But he doesn’t.  He tries to do the right thing.  Whether it’s saving children from slavery or keeping biblical artifacts from Nazis, Indy does the right thing.

How this translates for us: Act right in your life.  Don’t lie to your spouse about finances however small the lie may be.  Don’t take part in get rich quick scams – they don’t work.

There you have it. Five ways we can learn about personal finance from Indiana Jones.

Can you think of any more?

photo by Gaetan Lee

15 Things To Do With Your Economic Stimulus Check

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The government Stimulus checks started going out on April 28th. If you are expecting one you should start looking for it in May (here’s a post listing the dates).

So what are you going to do with the extra money? Here are a list of ideas for using your stimulus check:

  • Pay off credit cards – If you have any credit card debt the stimulus check will be a great way knock some of that out! Paying off the debt gives you an instant return in savings of whatever you would have paid in interest fees. Psychologically, you will help in getting the debt monkey off your back.
  • Contribute to a Roth IRA – You can take your money and put it into your Roth IRA. For 2008 the contribution limit is $5000.
  • Start an emergency fund – If you don’t already have some sort of emergency fund (three to six months expenses seems to be the conventional wisdom) then your stimulus check is a good way to start one. Even if you have one you can use the money to increase your fund. A great place to start one is with ING Direct (you can even get a $25 bonus by opening your account with $250).
  • Contribute to a 529 college savings plan – You can use the money to help save for your kid’s education by putting the money in a 529 plan. Not only do you help save for college but you might get a tax break as well depending on your home state’s plan.
  • Pre-pay your mortgage – Take the money and make additional payments to your mortgage. By making additional payments you will own your home faster and pay less in interest. Just make sure the payments go towards the loan principle and not next month’s payment (also check that your lender will accept pre-payments without fees or penalties).
  • Go on vacation – You may have been planning to do this anyway so here is a good way to fund the vacation. Go and do something that will be a great experience for the family that you will all remember.
  • Improve the house – If there’s something you’ve needed to improve on your home, such as a furnace, you can use your stimulus check to pay for it (or at least help). Other options could be new paint job, carpet, furniture, appliances, etc…
  • Car maintenance – Have you been putting off a car repair? Need new brakes? New tires? Your stimulus money can fund it. If your car is about to go kaput your stimulus check could help pay for a new car (or a good new used car).
  • Learn to invest – Do some research and take the money and start investing. Companies such as Sharebuilder and Zecco offer low-fee investing. You have to do your homework with this option but it might be just enough money to start investing but not so much that you will be crazy worrying if you lose it. If you invest through Sharebuilder you can buy partial shares of Berkshire Hathaway B class shares. I hear that Warren Buffett is pretty good at investing.
  • Pay off student loans – If you have high interest student loans then your stimulus check can be a great way to help pay your student loans off. Just like with credit cards paying off your high interest student loans give you the instant return in savings of what you would have paid in interest.
  • Have a nice evening out – Take your spouse out to a really great meal. Get babysitting and go to that great restaurant you wanted to try. Go see that new show that everyone’s talking about. Make an experience you will always remember.
  • Get physically fit – The stimulus check should be enough to pay for a year’s gym membership (or more than a year). Use the stimulus check as a catalyst to get in shape and make your life healthier. Not sure about a gym? Find a class such as yoga or martial arts to join. Not into that? Buy a new bike and go riding. Or get yourself some good running sneakers and running attire. Join your local running club and enter a few small races. You never know, you may one day run a marathon.
  • Go to school – Use your stimulus check to enroll in a college course or two. This can be toward a degree or just continuing education. Hey, you can take a personal finance course. Maybe learn a second language?
  • Do nothing – This is the easiest of them all. Put the money in your savings account and forget about it. You don’t have to spend it or find any particular purpose for it. It doesn’t have to burn a hole in your pocket. One day you might find a good use for it but for now it adds to your savings.

Personally, we’re closer to the Do Nothing suggestion. Our stimulus check will come via direct deposit right into our ING account. We have no specific plans for the money so it will be added into our savings. Our check may pay parts of many of the suggestions or for none of them. Either way it will earn interest until it finds a home somewhere else.

Do you have any other ideas for using the economic stimulus check?

photo by Argenberg

Best And Worst College 529 Plans From Morningstar

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Morningstar has released their picks for the top five and worst five 529 college-savings plans. To make their choices, Morningstar “focused on diversification, fees, flexibility, and the underlying funds.”Here are the top five:

– Illinois Bright Start College Savings Program
– Maryland College Investment Plan
– Virginia Education Savings Trust
-Virginia CollegeAmerica 529 Savings Plan (broker sold)
– Colorado Scholars Choice Savings Program (broker sold)

The worst five:

– Ohio Putnam CollegeAdvantage (broker sold)
– Mississippi Affordable College Savings Program
– Mississippi Affordable College Savings Advisor Program (broker sold)
– New York 529 College Savings Program
– Nebraska AIM College Savings Plan (broker sold)

I’m a little concerned that New York’s plan is considered one of the worst. Not only do I have two funds under the plan (one for each child) I also said recently that it’s a good plan. The main criticism from Morningstar is that the plan doesn’t have any exposure to international funds so it’s been missing out on international gains and it’s not hedged against US economy downturns. Other wise Morningstar says it’s moderately priced and they like that it’s made up of Vanguard index funds.

Many people, like myself, contribute to their own state’s plans since it’s likely they get a tax break. But depending on the plan and state you may be better off contributing to another state’s plan.

The Wall Street Journal suggests the following when considering a 529 plan:

“• When shopping for a 529 plan, you should consider costs, investment options and asset-allocation strategies.

• Weigh any tax advantages of investing in an in-state plan against the plan’s total costs.

• Look for annual asset-based fees of less than 1% for direct-sold plans and less than about 1.3% for broker-sold plans.

• Compare state plans at www.savingforcollege.com, www.collegesavings.org or www.morningstar.com.”Hopefully Morningstar’s review will prompt the New York 529 plan to consider some international exposure otherwise I may have to look into some of the better plans.

Do you contribute to a 529 college-savings plan?