I know that my new BFF Barack Obama wants me to go out and spend it, buy a new car, a house (It's amazing what $40 can get you these days). Uncle Sam expects every one to do their duty, shop, shop, shop. But me, I more inclined to do one of three things.
Before I state my choices, I must disclaim, that I am totally unqualified to give financial advice and the the following should not be construed as financial advice. So having covered my fanny, I can now return to telling you what my plans for my money and forthcoming Federal Tax refund.
The tax refund is easy, I am going to bank it and use it as the basis for foreign travel. Where? Trieste, Istanbul, or Buenos Aires are all places I dream to visit. But the tax cut, well the three choices are dump it into my 401k or make a regular payment to my emergency fund, or make an investment in myself, weekly yoga classes or Ballroom dance lessons.
Increasing my contributions to my 401k is tempting because by leveraging my tax cut by contributing to a tax-deferred savings seems like a good idea. The good thing about a depression is that means that stocks are really cheap. Unfortunately, I think stocks are really cheap and are going to stay cheap for a long time. Bill Gross, the managing partner of Pimco in his in his April 2009 Investment Outlook states
"Investors should therefore favor stable income as opposed to speculative growth or the subordinate liability structures of most private market balance sheets. "
Or as may Grandpa Roby would say, "It's better to earn interest than pay interest." If Gross is right, then stocks are not going to offer a return that justify their risk. I am still contributing to my 401k, but any new windfalls will go into more stable investments, i.e. savings. Please remember I am only speaking for myself and not giving anyone financial advice.
If I were paying interest on credit card debt, I would be wise to use to use tax cut and my refund to pay down debt. Paying down debt is another way of leveraging the money I received from my tax cut. Because debt is like an added tax on your earnings. But my credit card debt is usually paid in full each month, so that is not a problem.
Since I have no credit card debt, then the case for contributing more to savings is compelling. First, most Americans don't have an adequate emergency fund. Many are just one paycheck away from financial disaster. Illness, divorce or job loss can destroy our financial lives. Even a $500 emergency fund. MSN Money writer M. P. Dunleavey was shocked when she discovered
"Many Americans feel their paychecks are already too stretched for them to save. According to a February 2007 telephone survey by the Consumer Federation of America, only 40% of adults have a separate account for emergency expenses....
"But this shocked me: Of those with incomes of $75,000 or more, only 58% said they had a rainy day fund. That means even 42% of America's wealthier citizens don't have funds set aside for when trouble strikes.
"And, as get-out-of-debt guru Dave Ramsey, author of "The Total Money Makeover,' once told me, 'You need to build up a rainy day fund, because -- guess what? It's gonna rain.'"
If I do decide to use my stimulus tax cut to build up my rainy day fund, what's the best way to save my $40 a month windfall? According to Ronald T. Wilcox in his book Whatever Happened to Thrift, the best way is to have the money withdrawn from my paycheck before my ever see it,'When you decide that making regular additions to savings from your income makes sense, arrange to have the money automatically withdrawn from your paycheck or other payments you systematically receive" (p. 127).
I've read for years that this is the best way to save. I do it for my 401k, but I've refused to have money automatically put into savings. Now you can understand why I am not qualified to give financial advice.
The third option is to invest in myself. Self-investment for most people means going to school to get an advanced degree or some other kind of career training. I've done that and thanks to this economy, I'm not planning on changing jobs any time soon. An extra $40 dollars a month would be a good down payment for yoga classes or Tango lessons. One of my personal goals is to do more yoga, it is a beneficial form of spiritual and physical practice. As for Tango lessons, well one of my dreams is to do the Tango in Buenos Aires, take a Tango tour. My tax refund will help to pay for the trip and Tango lessons will just make the journey that much more enjoyable.
How did I solve my quandry? This evening after work, I went over to the credit union and arranged for them to take $100 a month and put into a 2-year certificate of deposit. So $40 from the government and $60 from me. As to investing on myself yoga and tango lessons. I still plan to do that. I've been tracking my expenses and find that so far this year I've spent on average $323 a month on dining out. So I'll pack my lunch and cook dinner at home more often and if I'm lucky, I have plenty of money for my emergency fund, yoga, tango and travel.
Unfortunately, the president will have to count on somebody else to spend the nation out of the recession. But the number of people willing to continue to indulge in conspicous and economically meaningful consumption may be decreasing. According to Ronald Wilcox,
"Economic stimulus packages that speak of short-term fixes have little hope of success. American households are in a far more serious debt position than households of the 20’s. If you hand Americans money right now, they will save it. They will ignore politicians who exhort them to spend it. The American consumer cannot pull us out of this downturn, at least not yet. Over the next months or even years, we will experience a rapid decline in household debt and an increase in savings. It will take time, and savings, to resurrect the economy."
I support President Obama, but I agree with Ronald Wilcox. I'm going to ignore the politicians and save my $40 a month tax cut. In the long run, I know I will have peace mind because if I have a financial catastrophe, I have money to recover from it. I may even help the American eoconomy in the long term. I may be wrong, I will most probably be wrong, but more saving is what I plan to do and keep doing.
Capitano Tedeschi
30
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