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Not so fast! What to do with your holiday cash

Did you get an unexpected windfall? Vera Gibbons from Kiplinger’s Personal Finance magazine has advice on using gift cards or the cold hard stuff.
/ Source: TODAY

At the top of many holiday wish lists is cash, and 75 percent of Americans expected to give at least one gift card this season. Whether you got gift cards or the cold hard stuff, Vera Gibbons from Kiplinger’s Personal Finance magazine has some ideas about what you can do with it.

According to the National Retail Federation, 75 percent of Americans intended to buy at least one gift card this season. The average shopper was expected to spend $88 on gift cards, leading to a total of $18.4 billion in card sales over the holidays. That's a 6.6 percent increase from 2004.

Also interesting, sales of Hallmark greeting cards that are designed to hold cash, checks or gift cards have increased nearly 150 percent in the last two years.  Customers surveyed about cash gift amounts say: $50 or more is appropriate for a close relative, $25 or less is suitable for not-so-close kin, and $20 or less is what they would give to a friend. Here’s a list of things you can do with holiday cash.

Redeem gift cards ASAP
Chances are you got one or several, as various surveys indicate.  An estimated 12 to 14 percent go unredeemed, and that's like throwing cash out of the window.  Use them as soon as possible, particularly since some come with expiration dates, lose value after a certain period of time (generally after 18 months), or have monthly maintenance fees and other charges (especially those bank or credit card-issued cards).  And try to keep within the gift card limit. One survey found that 45 percent of those who receive gift cards spend more than the face value of the card.

Pay down credit card debt
If you're like 60 percent of Americans, you have credit card debt.  The average household has about $9,000 in credit-card debt.  And, of the 60 percent of those who do not pay off their balances each month, that number is even higher, closer to $12,000.  Paying that off should be a top priority.

Credit card debtors beware!Credit card companies are going to raise the minimum payment amount.  Federal guidelines start Jan 1st.  As many as 19 million cardholders regularly pay the minimum amount.  They might be shocked in coming weeks to find that the new minimum payment is three times higher than what it used to be.  Bank regulators say changes are needed to help Americans climb out of the hole — we've got $800 billion in credit card debt!

Save for retirement
Put it toward your future in an IRA — either traditional or Roth. The deadline for 2005 contributions is when you file your income tax returns (April 17th, 2006 because the 15th falls on a Saturday). The maximum contribution is $4,000 for 2005 and 2006. Additional catch-up contributions for those 50 and older is $500 for 2005; $1,000 for 2006. If you received a wad of cash, you could make contributions for both years.

Which to buy?  Roth or traditional IRA?
If you can do without the tax break upfront, go for the Roth because it's a much more flexible instrument. Everything that comes out at retirement after age 59-1/2 is tax free and penalty-free. And for long-term retirement savers, the tax free withdrawals really give the Roth an advantage over the traditional IRA.

Set up a college fund
If you had a baby this year, and if college costs continue to rise at their current levels, by the time your newborn is college age, in about 18 years, four years at a private college will cost more than $300,000. Start saving now.  One of the best college savings vehicles we've got is the state sponsored 529 plan. These have very high contribution limits, the money grows tax-free, they're open to anyone regardless of income, and have a low impact on financial aid eligibility.  For more on this, or to see which plan is best for you, two sites to look at: savingforcollege.com and finaid.org.

Emergency savings account
Everyone should have an emergency fund with enough in it to cover 3 to 6 months of living expenses.  Park it in a basic saving accounts or money market account.  This money is meant to serve as a buffer/cushion to lessen an unexpected financial blow like a job loss, illness, injury, etc.

A short-term CD
People have been reluctant to put money in their emergency funds because the savings rates have been so low. But they're going up. As the fed has been bumping up short-term interest rates, banks have raised rates on savings accounts, money market accounts and short term CDs (yet another good place to park that holiday cash, particularly if you're not sure what, specifically, you'd like to do with the money). You'll find some of the highest rates at virtual banks because they don't have the fixed expense of maintaining a network of branches.

Vera Gibbons is a special correspondent and contributing editor for Kiplinger's Personal Finance magazine.