How to Invest Your Tax Rebate

N E W Y O R K, July 20 -- Starting next week, the government is mailing out 91 million tax rebate checks worth $38 billion, leaving Americans with an unexpected windfall of several hundred dollars apiece.

Under the tax-relief package signed into law last month by President Bush, the rebates range from $600 for married taxpayers to $300 for single taxpayers, based on income level.

When Will I Get My Rebate?

The White House and many retailers would love it if people cashed the checks and headed to the local mall to spend the whole loot. Some stores, including Wal-Mart, are offering to cash their customers' refund checks, free of charge, with the hopes that they will end up spending money in the store.

Other retailers are timing promotions and discounts to coincide with the rebates to encourage customers to spend them. But Good Morning America's financial contributor Mellody Hobson, of Ariel Capital Management, says there are smarter things to do with the money.

Here are her five suggestions:

Pay Off Credit Cards: Although it would be tempting to run out and buy a digital camera or a DVD player, a smarter move would be to pay off credit card debt, Hobson said.

If you make the minimum payments on a $1,000 balance, you will continue to carry the debt for almost eight years. But if you take your $300 refund and put it toward your credit card bill, you can pay off that bill in three and a half years and save $562 in interest.

Open an Education IRA: You don't have to be a parent to open an educational IRA. It can be for nieces, nephews, grandchildren, godchildren or good friends, perhaps given as a present for a baby shower or a birthday.

If you contribute your $300 tax return into an educational IRA for a one-year-old today, that $300 will be worth $2,060 when the child turns 18, assuming a 12 percent average annual total return.

Under current law, the maximum contribution for these accounts cannot exceed $500 a year and must be made before the beneficiary reaches age 18. But a new law that goes into effective in Jan. 1, 2002, allows a $2,000 contribution each year per child.