On Jan. 7 President Bush proposed a plan to stimulate the economy. Key to his plan are reducing taxes and putting more money in the paychecks of working folk.
Republicans and Democrats -- whose own plan for economic growth would provide every taxpayer with a $300 tax credit -- are set for a showdown. Who knows what tax relief, if any, we will receive or should receive. But let's play a what-if game.
What if Bush's plan passes?
Under the president's proposal to speed up tax relief, 92 million taxpayers would receive, on average, a tax cut of $1,083 in 2003. According to figures provided by the White House:
* Forty-six million married couples would receive an average tax cut of $1,716.
* Thirty-four million families with children would benefit from an average tax cut of $1,473.
* Six million single women with children would receive an average tax cut of $541.
* Thirteen million elderly taxpayers would receive an average tax cut of $1,384.
The president's economic agenda would make all the tax-rate reductions from the 2001 tax law effective this year -- and retroactive to Jan. 1, 2003. The Treasury Department would adjust the amount of money withheld from your paycheck for income taxes.
For purposes of my what-if game, let's take the average tax break of roughly $1,100 for a family of four with two earners making a combined $39,000 in income. Without getting into a debate on the merits of the tax break, here are some of the things you could do with the money, should you ever get it:
* Establish an emergency savings of three to six months' living expenses. As Karl H. Romero, a certified financial planner from Santa Ana, Calif., so aptly put it: "You need to have a reserve because the water heater will break. Your car will break down. Something is always happening." Despite the puny interest rate banks are paying, Romero suggests parking money earmarked for this purpose in a savings account. "You need to put the money somewhere where it's safe without risk to the principal," he said.
* Pay down your credit card debt. If you are like the average cardholder, you have about $8,000 in charges on your credit cards, maybe more. You might be inclined to think $1,100 wouldn't make a significant dent in your balance. But keep thinking that way and you'll stay in debt purgatory. For example, let's suppose you're making only the 2 percent minimum payment of $160 on the $8,000. At 18 percent, it will take you 647 months to be rid of the debt -- almost 54 years. In that time, you will pay $22,931.52 in interest. But if you paid an extra $91.66 a month (that's the tax break of $1,100 divided by 12 months), and kept paying it, you would pay off your credit cards in 44 months. As a result, you would pay $2,951.08 in interest. I think that's worth the effort.
* Increase your contribution to your 401(k) or similar workplace retirement plan. One-quarter of those with access to 401(k) plans do not participate, according to the Employee Benefit Research Institute. Despite the current economic and stock market conditions, your 401(k) is still one of the best ways to save for retirement.
* Play catch-up on your retirement savings. Under the "catch-up" provision of the 2001 tax cut, workers age 50 and older can contribute an extra $1,000 for 2002. If Bush's plan goes through, you won't have to worry where you're going to get that extra $1,000.
* Open a 529 college savings plan. Earnings in a 529 plan grow tax-free, and when you withdraw the money the federal government does not tax it if you use the money for college expenses. To figure out how much you might need to meet your child's college costs, use the online worksheet provided by the American Association of Individual Investors at www.aaii.com/promo/hastings/savings.shtml. Don't get discouraged, however, if the estimate of how much you need to save annually equals the price of a Ford Focus. Put away what you can, even if it's just $1,100 a year. At least it's something. To find out more about 529 plans, go to www.savingforcollege.com.
After Bush announced his economic stimulus plan, I watched news interviews of some people commenting that the tax break didn't amount to much money. In fact, among gamblers, betting $1,000 is referred to as dropping a "dime."
I'm not a gambler, so I hardly think $1,000 is chump change. Whenever you get a windfall, large or small, use it as an opportunity to improve your financial standing.
Don't forget to join me online Jan. 29 at 1 p.m. at www.washingtonpost.com for a live discussion of this month's Color of Money Book Club selection, "The Path to Happiness and Wealth: How to Enjoy Money and Life at the Same Time." Author Steve Rhode will be my guest.
While Michelle Singletary welcomes comments and column ideas, she cannot offer specific personal financial advice. Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or by e-mail at firstname.lastname@example.org.