Thursday, February 28, 2008

What would you do with $800?

A while ago, when the government was first talking about the stimulus package, the local newspaper here had a front page article: "What would you do with $800?" The package has now passed, and I keep seeing the same idea from this article in lots of places. In short, most americans will receive a check from the IRS in a few month. They have three options with the money:
-spend it
-save it
-pay off debt

The general consensus is that the best thing for one's personal finances would be to pay off debt and save it. However the best thing for the economy would be to spend it.

I argue that the best thing for the economy would be to first pay of debt, and second save the money. Think about it. The main reason for the current downturn of the economy is that people spent too much money on houses and credit cards, and now people are defaulting on those accounts and financial corporations are posting huge losses of money. This in turn is affecting the rest of the economy. The brightest looks at the economy say that the housing/credit crisis will continue to be a problem. So I argue that the best thing to do would be attack those directly, not attack the side effects. So how do we do this? First pay off debt. If we all payed down debt, then there wouldn't be a big of losses, and the economy could start going up again. After that: put the money in the bank. You see, that money in the bank not just a nice fall back, that even pays you back through interest. When the banks have more money then can open up lending again (only be wiser about how they do it. That money goes to large things like buying houses (hey a solution to the housing crisis) and building businesses (wow, creating jobs, feeding money back into the economy.)

So what about spending the money? Well from an economy standpoint, it can create a short term jump in spending that ends in a few weeks. Most likely people will spend more than they get, go deeper in debt, and we're even worse off then before. Compare that to the idea that after the current debt is payed down, people are able to spend more in the long run. Also when people have savings, then the next time there's a downturn, they can turn to savings and live off that. That way the downturn doesn't last as long.

So when you get a rebate check, I beg of you, help the economy and pay off your debt and save it. When others talk about spending it, tell them to help the economy and spend the check on paying off the credit cards. After that, maybe they can buy themselves a present like a shiny new, high yield savings account. It's the gift that keeps on giving (literally.)

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