Using Your Tax Refund to Eliminate Debt

When springtime rolls around, some people see flowers and some see dollar signs, in the form of a nice tax refund check from Uncle Sam. Before you go on a shopping spree, consider using that extra cash to strengthen your financial footing by eliminating debt. You’ll save money in the long run by avoiding prolonged interest payments. So before you cash that check, review your finances to make the best decision for your wallet.

Analyze Your Secured Debt

Not all debt is created equally, so before deciding what to pay off first, take a look at everything you owe. Tally up your personal loans, car loans, credit card debt, student loans, and anything else requiring you to make monthly payments. If you have difficulty making your monthly payments, consider paying off your secured debt first. That term refers to a loan that is tied to an actual object, like your car. When you miss payments on your car, the lender can repossess it; when you miss payments on your credit card, your credit rating will go down, but no one can take away anything you own. So if your monthly budget is tight, you might want to pay down your car loan so your mode of transportation is not affected.

Determine Your Highest Interest Rate

On the other hand, you may want to categorize your debt by interest rate if meeting your monthly payments isn’t a concern of yours. Review the terms and conditions of each loan determine which one carries the highest interest rate. Because each dollar of that loan costs you more money than the other loans, you may want to pay off that loan first.

Leave Your Mortgage and Student Loans Alone

Unless your mortgage and student loans have adjustable interest rates that continue to creep up, pay off all your other loans first. The most important reason for this is because the amount of interest you pay on both loans is tax deductible. Plus, those interest rates are generally lower than other types of loans, especially if you have federal student loans.

Make Your Money Work For You

Receiving a substantial tax refund every year essentially means you are overpaying your taxes every month. Consider changing your deductions to increase your take-home pay each month. By allotting that money towards paying down your debt on a regular basis, you’ll avoid paying all that extra interest that accrued while waiting for your next tax refund.

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