Like many of us, Tanya would like to get the mortgage paid off in something less than 30 years. And, she's willing to pay a little more than promised to accomplish that goal. So let's see whether one extra payment a year is enough to get the job done.

Tanya does have the right idea. Especially in the early years of a mortgage. Her monthly checks repay very little of the principal at first. It will be years before she's made much of a dent in the amount owed on the mortgage.

Let's take a standard 30 year, 8% mortgage. At the end of the first year, Tanya will still owe $991.65 for every $1,000 she borrowed. She will have written checks for $88.08 and only reduced principal by $8.35. So for the first year for every dollar that she paid, less than one thin dime went to repay the amount she owed.

So Tanya's strategy is a good one. Put more of each payment to work reducing principal because there's less interest owed.

But unfortunately she won't be able to cut her mortgage term in half with one extra payment per year. At least not at today's interest rates. In fact rates would have to be 17% for that to happen. But that doesn't mean that it's still not a valuable tool for Tanya to consider.

One extra payment per year on an 8% mortgage would move her payoff on a 30 year mortgage up seven years. Not a shabby reduction.

An alternative would be to add 1/12th of a payment to each monthly check. That would spread out the extra payment over the year. Doing that would pay off the mortgage a couple of months sooner than the extra annual payment.

So one extra payment wouldn't cut the mortgage in half, but it would cut about 25% off of the term.

What about other debts? The idea is the same. Paying additional principal means that more of each future payment is reducing even more debt rather than just paying the interest owed.

One major difference. The longer the life of the loan the bigger the effect of any prepayments. Paying extra principal on a 30 year mortgage makes a big difference. The difference on a 3 or 4 year auto loan isn't so significant.

For comparison, we're going to assume an 8% 48 month car loan. For every $1,000 borrowed the monthly payment would be $24.41. The payment is higher than for the mortgage because the $1,000 that was borrowed is being repaid over a much shorter period of time.

For instance, in the first month that $24.41 payment actually reduces the amount owed by $17.75. But adding one extra payment per year will only pay off the loan 3 months early. So paying extra principal on an auto loan won't make a huge difference.

But that doesn't mean that the strategy only works for mortgages. Credit card debts are another fine candidate for extra payments. Most credit cards are designed to keep you in debt forever.

Many payments are as low as 1.5% of the amount owed. That means that you'll be paying only $15 per $1,000 owed. And if your interest rate is 15% (a typical rate) you'll be paying off that debt for 133 months or over 11 years. Even if you don't charge another cent or trigger any fees on the account.

Doubling the $15 minimum payment to $30 would cause the loan to be repaid in just 43 months. A big difference.

So Tanya's on the right track. Paying extra can make a difference. To get the biggest bang for her buck she should use extra money to pay off loans that run for many years like mortgages. Or ones that carry a high rate of interest like credit cards.

Dear Gary,
This may be silly but I hear so much about rebates and getting money back for your products. But how do rebates work? How can a company make money if they just give it back?
Julie

Like Julie, most of us like to get a bargain. And when someone sends us a check for buying their product, well that's even better! And manufacturers offering rebates know that. They love it when we buy their product to get a rebate check.

But Julie asks a good question. How can they afford to offer rebates? Especially the large ones. Sometimes the "after rebate" price is free. Don't the manufacturers need to make money to stay in business?

Manufacturers offer rebates for a number of reasons. They can be used to clear extra inventory, control pricing structures and even provide some extra cash flow for the manufacturer.

Sellers see rebates as a good tool to move excess inventory. It's also handy when a new model is about to be introduced. Automakers use this strategy. So do companies making appliances. They know that if prices are similar most consumers will choose a newer model over an older one. A rebate allows them to easily discount the older model and clear out the inventory.

Sometimes manufacturers use rebates to try out a lower price. A rebate allows them to easily find out whether demand would increase at the lower price. If it doesn't work they can always kill the rebate. On the other hand, once lowered it's hard to raise prices back to their original level.

You'll find that some rebates seem to go on forever. If a rebate is active for more than 90 days, it's probably the company's way of lowering the real price without changing the 'official' price. Sometimes changing the official price has legal consequences that they want to avoid.

Manufacturers also realize that every sale doesn't have to be profitable. Sometimes they're willing to take a loss on one item in the hopes that you'll buy other things. The goal is to make you profitable as a customer.

Computer printers are a good example. The manufacturer doesn't really need to make money on the printer. If it takes a rebate to get you to buy their model, that's fine. They're happy to make money on the ink cartridges that you'll be buying on a regular basis. They know that most consumers will spend more on the ink than they did on the printer.

Sometimes the "shipping and handling" charges provide the profit. What the manufacturer gives up in product pricing they take back in shipping charges. Some even cheat by raising their shipping charges above normal levels.

A recent trend has been for manufacturers to team up on rebates. One company will offer a rebate if you sign a long-term contract with another company. Computer manufacturers and internet service providers are big players.

Rebates also offer some interesting cash flow opportunities for manufacturers. Remember that they get to use your money until you actually cash a rebate check. It might not seem like much. But if they have hundreds of thousands of dollars 'in float' all the time the interest earnings add up.

Manufacturers also know that not everyone will collect on their rebates. Some won't bother to send it in. Others won't follow directions which disqualifies their rebate. Although it's difficult to get figures, some experts estimate that 20% of all rebates go uncollected.

So how can Julie make the most of rebates? She might want to consider some guidelines to use before making a purchase with a rebate.

Make sure that you can and will send in the rebate form. That means getting the necessary receipts and proofs of purchase. Verify that there's enough time before expiration to send it in. And make sure that you're organized enough to get the forms into the mail on time.

Don't buy just because you get a rebate. Some 'after rebate' prices still don't offer good value for your money. And remember to include shipping and handling charges in the price.

Make sure that the rebate doesn't obligate you to any other contracts. Carefully read the rebate form. Understand any commitments you're asked to make.

It's important for Julie to be sure that she can afford to pay for any purchases now. There's nothing worse than putting charges on your credit card and paying interest while you wait for a rebate to arrive.

Be cautious of offers where the pre-rebate price is significantly higher than the item's normal price. Especially on the internet. Some websites are using large rebates in a desperate attempt to attract customers. A company that goes out of business won't be honoring it's rebates.

When used properly, rebates can be a good tool for both the manufacturer and the consumer. Thanks to Julie for a good question.

Dear Dollar Stretcher,
Our 17 year old will begin college in the fall. We have quite a few savings bonds for her and we'd like to cash in the mature ones. What do we need to know about any tax that will be due on them? Will she need to claim the money from them on her tax forms next year? She works part time and will likely continue in the summers. Is this considered "income" for her?
Thanks so much!
Trish

Trish is at an interesting time for parents. The point where pride in our kid's accomplishments runs smack into the pain of paying for college! And it does take a lot of money to get that college degree. According to CollegeBoard.com when you include tuition, books, room & board, transportation and personal expenses, the average student at a public college or university will spend $10,458 per year.

But, that shouldn't deter Trish or her daughter. The average college graduate earns 81% more than someone with a high school diploma. And, most college students receive financial aid. Of full-time students, sixty percent at public colleges and universities receive some form of aid. hopefully Trish's family has explored those options.

OK, let's take a look at that stash of savings bonds. There may be a happy surprise for Trish. We'll need to review savings bonds and how they work. About ten years ago savings bonds got a facelift and also got more complicated.

For years the most popular bond was the Series E/EE. You purchased a bond at a discount to the face amount of the bond. Gradually it gained value until the maturity date when you redeemed it at the full face amount. And that's when you paid federal income taxes on the interest earnings. Your principal and interest was guaranteed by the U.S. Government. You can still buy Series E/EE bonds.

Another group of savings bonds, Series H/HH, distribute income to you every six months. The lowest denomination is $500. The interest rate is set when you buy the bonds and is adjusted on the 10th anniversary of the issue date. They've paid 4% since 1993.

If you have E/EE bonds and want to begin collecting income without redeeming the bonds you can exchange them for HH bonds. That allows you to continue to defer much of the income tax until you cash in the HH bonds or they reach their maturity date.

Finally, there's a series of savings bonds that are adjustable for inflation. Series I bonds accrue interest. They're purchased at face value. Holders receive interest in two parts. You get a fixed return that is set at the time the bond is purchased. Then there's a variable return that's adjusted twice a year for inflation. I bonds come in denominations as small as $50.

Taxes on Series I bonds are delayed until you redeem the bond or begin to collect your interest. The income is exempt from state and local income taxes. For current rate information on all savings bonds call 1-800-487-2663.

Now, to answer Trish's first question. Yes, the income from the bonds is taxable under most circumstances and must be declared by the bond owner.

One thing could help Trish's family. Series EE bonds issued after January, 1990 and all series I bonds are eligible for the "Education Bond Program". If you spend money for tuition, room, board and other qualifying educational expenses the program allows for interest to be partially or completely excluded from Federal income tax.

The program does have some family income limits that could reduce or eliminate this benefit. It also requires that the bonds be owned by the parent(s) unless the student is 24 years old or older. But, even if Trish's daughter owns the bonds, under certain circumstances they can be re-registered. To learn more about the program visit the official Savings Bond website at www.savingsbonds.gov.

Trish's family will also want to take advantage of the standard deduction available to her daughter. She can earn up to $4,400 in wages or $700 in unearned income (i.e. interest from savings bonds) per year without having to pay taxes. That amount of income will still allow her parents to claim her as a dependent on their tax return. She will need to file a tax return to get a refund on taxes that were withheld.

Congrats to Trish's daughter on her high school graduation. Hopefully college will be a wonderful experience for her.