Personal Tax Rebates

Providing the economy with what he calls a “booster shot,” President Bush signed the income tax rebate into law last week. The $168 billion stimulus package of personal tax rebates and business tax cuts could bolster consumer spending later this year, economists say, and minimize the pain of a possible recession.

Your 2007 tax return will determine your eligibility and your rebate amount. In most cases, individuals will receive a maximum of $600, $1,200 for taxpayers who file a joint return. Expected minimums? $300 for individuals and $600 for taxpayers filing jointly. Parents also will receive an additional $300 for each qualifying child.

Eligibility for the stimulus payment is subject to income limits. The payments will be reduced for individuals earning $75,000 or more and for married couples earning $150,000 and up.

You’re likely to receive two notices from the IRS. The first will explain the stimulus payment program. The second notice will confirm your eligibility, the payment amount, and the approximate time table for your payment. Save this notice for your 2008 tax return.

Although surveys show many consumers say they’ll save the tax-rebate money, Mark Zandi, chief economist for Moody’s Economy.com, notes in a recent article on MarketWatch that it’s likely that most of rebates will be spent. He bases his opinion on a recent study that showed Americans spent the bulk of their tax rebates in 2001 and 2003.

Also in the MarketWatch article, “Tax Rebates Really Will Boost Economy, for a While,” economist Mike Englund of Action Economics says the rebate, which amounts to a one-time 18% increase in monthly pay, may translate into a “second holiday shopping season” later this summer, even if Americans spend only half of what they receive.

However, in a January 31st press release, Mark Johannessen, CFP®, president of the Financial Planning Association® (FPA®), says its “ironic that Washington is telling Americans to go out and spend to help save our troubled economy.” Labeling the package “anti-savings and anti debt-reduction,” he says it might help the economy, but it won’t help Americans dig out of their debt.

He notes, “The problem is that the average American household credit card debt is $8,400, the national savings rate is minus 1/2 percent and bankruptcies are on the increase. So, spending the rebate may not be in the best interest of many Americans. Not setting up a household budget is how many Americans got into financial trouble in the first place.”

That’s something to think about before you hit the mall.

Your Portfolio is Down: Don’t do Anything Foolish...

As you may be aware, the recent volatility in the global stock markets has made some investors nervous, frustrated, and fearful. More often than not, when left unchecked, these emotions can lead to wealth crippling outcomes. Surprisingly, these losses of wealth are not market driven - they are behavior driven.

In October of 2007, the Dow Jones Industrial Average closed at 14,164. Barely three months later, on January 22nd, the Dow hit at 11,509. Wow! That drop was nearly 19%! Should you be crying in the streets, shrieking in despair because your portfolio is down over the past three months? I think not...

Try this: You want the stock market to go down. Actually, you need the stock market to go down.

The sophisticated investor knows this: We get compensated for our patience with market fluctuations in the form of higher average long-term rates of return. More simply put, your grandmother’s savings account earned only 3% or so because she didn’t want to “lose” any money. She couldn’t handle fluctuations, and therefore she didn’t even earn enough to outpace inflation.

Unfortunately, your sweet grandmother was fighting the wrong battle. She was trying to preserve her capital instead of trying to preserve the purchasing power of her assets. Consider the example where she puts $10,000 in her savings account at 3% and leaves it there for 30 years in a world that averaged 4% inflation. 30 years later, that $10,000 would only be able to purchase $7,400 worth of goods. Sure, her account balance would look great at just over $24,000, and she would have succeeded in her quest to earn interest and to never “lose” any money. The problem is she lost purchasing power along the way and now she’s packing up her things to move in with you because she’s run out of money.

Understand that in the pursuit of long-term returns that outpace inflation you will have to weather market fluctuations with patience and resolve. The U.S. Market averages a down year about once every four or five years. Does it make sense to get frustrated and upset every time we have down year? I don’t think so... as savvy investors, we expect these fluctuations.

Getting mad about a down year in the stock market makes about as much sense as getting mad when it rains outside. A rational person understands that rainy days and down markets happen from time to time and that doesn’t mean you shouldn’t venture outside or that you shouldn’t invest responsibly in a diversified portfolio.

Now that we’re thinking rationally, it’s very important that we are fully cognizant of the mistakes that ill-advised investors make during temporary market declines. A temporary market downturn is likely going to make you want to “do something” and “take action” to assuage your fears and try to change the way you feel. It’s a natural and expected response to the apprehension that a fluctuating market will manifest.

Invariably, the action that investors want to take is to sell their investments to prevent further losses. They feel better because they are “doing something” – yet they have just made the classic mistake of locking in losses and missing out on the inevitable market recovery. Let me be clear, it is the knee-jerk reactions of irrational investors that cripple wealth, not the fluctuating market. Remember, you need the stock market to go down from time to time so that you can patiently build wealth while others fight the wrong battle.