Saved & Saving: Top 5 Tips For Eliminating Debt With Your Tax Refund

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If you are among the nearly 80% of Americans expecting a tax refund, perhaps you may also be wondering how this money can be used to help clear up some debts. Perhaps you own a house or a car? Or maybe you have other reoccurring bills like credit card payments or student loans.

Proverbs 21:5 – Good planning and hard work lead to prosperity, but hasty shortcuts lead to poverty

  1. Figure Out Your Debt: Finding out where you stand can be scary, but not knowing can actually be quite costly. Even if your tax refund cannot cover everything, you might be surprised at how much you’ll save in the long run with just one lump sum payment. Use a debt calculator to see how much you can expect to pay over time based on your interest rate with just minimum payments. Then play with the numbers to see exactly how much you can potentially save if you pay just a little more each month.
  2. Create an Action Plan:  First step here will be to sort your bills and organize them by priority. Decide which bills you might be able to pay right away and which bills might benefit you if you pay them off early. Those benefits can either be savings or outright ownership. For example, if you pay off your car note, then the car will be yours. If you pay down the balance on a high interest credit card you will save a substantial amount of money. By using your tax refund to eliminate these debts, you will not only save money but you’ll now have an opportunity to jump-start your future goals of living debt AND stress-free!
  3. Eliminate Costly Debts First:
  • Credit Cards: So why does it make sense to use your tax refund to pay off credit cards? Simple, its in your best INTEREST! The higher the interest rates, the more you’ll pay over time on your purchases, especially if you are only making minimum payments each month. So that means, that the cute Sunday dress or really nice dress shirt you bought on sale for $40 might wind up costing you as much as $150 over time. If cutting your credit balances is your goal this tax season, find out how much you owe each of your creditors. Contact them directly and find out if they can offer you a lower interest rate. This has worked for me in the past. Should you decide to use your tax refund to cover the cost, don’t be tempted to overspend again. As Jesus said “Go and sin no more!”
  • Student Loans:  According to 2018 statistics from Make Lemonade,  there are more than 44 million U.S. borrowers with $1.4 trillion in student loan debt. Combine this with rent, utilities and other living expenses and you may have a recipe for what seems like a never ending debt cycle. Try and get ahead of this and contact your lender to find out if there are any prepayment penalties associated with your loan. If you are able to apply your tax refund as a lump sum payment, not only will you save on interest in the long run but you’ll shorten the length of the loan commitment as well.
  • Mortgage: Using your tax refund to pay down on your mortgage makes sense only if you are able to apply the payment to the principal portion of the loan. Make sure that you let your lender know in advance how to apply your payment, otherwise they may automatically apply it to unpaid interest on the loan. By paying down on your home you’ll not only save a tremendous amount of money in interest charges but you’ll also be able to build equity and own your home sooner.
  • Medical Bills: Health challenges can be sudden and unexpected. Even with insurance coverage, many individuals sometimes find that it may not always fully cover the cost of a hospital stay.  If you receive a bill don’t ignore it. Most people don’t realize that medical debts can appear on your credit report and lower your score as much as 100 points. If you are unable to pay because of financial hardship, be proactive and contact your hospital’s finance division to review your options.  If you are able to cover the bills with your tax refund, then pay it off and consider it one less debt in your name.

4. Create an Emergency Fund: If nothing else, 2017 taught us that disasters can happen. Hurricanes, mudslides, tornadoes, floods and fierce volcanic-like wildfires all dominated last year’s news and this year is gearing up for a possible repeat. Disasters that fall under “Acts of God” are rarely ever covered by home insurers. When such disasters occur, there’s usually little if any time at all to prepare.  Depending on the magnitude of the disaster, survivors generally are blessed just to be able to leave their homes with the clothes on their backs. Nevertheless, an emergency fund can provide much-needed temporary help during these times.  But also keep in mind, natural disasters are not the only unforeseeable life events. Sudden illness, job loss or even divorce can also hinder your ability to pay bills. Typically, three to six months of reserved cash can cushion you and cover basic living expenses until you get back on your feet. Deposit your tax refund to help you advance this goal. Use automated banking if necessary to make prescheduled deposits into a separate account. It’s the easiest way to save. Just set it and forget it!

5. Check Your Money Habits: For some, this might be the hardest part of the process. Being honest with yourself and examining the real reasons why you got into debt in the first place. Whether it was because of impulse shopping or perhaps due to something completely outside of your control. The reality is, that while we may forgive our debtors, debtors rarely ever forgive in return. They just want what you owe. While the road to becoming debt-free might seem like a long haul, rest assured the journey is not without reward.  Learn  how to be a responsible steward over your resources with Author Dave Ramsey’s “The Total Money Makeover: A Proven Plan for Financial Fitness” It is an excellent resource, complete with step-by-step instructions on how to get your financial house in order using Christian principles.

More “Saved & Savings” Tips Coming Soon!

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