Getting a tax refund may make you feel like you hit the jackpot! You will surely be thinking about how you are going to put that extra cash to use. While the most tempting option is to splurge and purchase items which could be considered ‘wants’ rather than ‘needs’, it’s important to develop a plan for how to use your refund most effectively.
If you have debt weighing you down, then your gut instinct might be telling you to pay off what you owe. That feeling is totally valid – getting rid of debt should definitely be a priority in order to achieve financial freedom. However, before applying your tax refund toward outstanding debts, there are some things worth considering. In this post we’ll explore some strategies for paying off debt with your tax refund.
Why Paying Off Debt Can Be A Smart Financial Move
If you are considering using your tax refund to pay off debt, it can be a smart financial move. When you pay off debt, you are essentially paying yourself back with the interest you are saving. This can help to free up money in your monthly budget and can also help to improve your credit score.
While utilizing your tax return to pay off debt can be an effective way of getting ahead financially, it’s important to consider the bigger picture. Before allocating those funds, ensure you are up-to-date on any overdue bills and you have set aside money for emergency expenses.
Calculate All Your Outstanding Debt
Once you know you are receiving a tax refund and how much money you will be receiving, you will need to calculate how much debt you have. List all your debt on a spreadsheet, including the amounts and the interest rate you are paying for any outstanding credit card balances, medical bills, personal loans, etc. Once you know how much debt you have, and the interest you are paying, you can decide how much of your tax refund you would like to use to pay it off.
Create A Plan
Before allocating your tax refund to debt payments, make sure you have taken care of any overdue bills that need to be paid off as soon as possible. Additionally, if you do not have an emergency fund remember to save some money to have it available for emergency expenses that might arise.
Once you have a grasp on your debt, and how much of your refund you plan to apply to it, you can create a plan for how to apply it.
Make sure your plan includes specific goals—like which debt you will pay off first and how much of your debt you’ll pay off each month—and your timeline for paying them off. This will help motivate you to achieve debt freedom.
Applying Your Refund To High Interest Debt
If you have multiple debts with different interest rates, it may make sense to focus on paying off the debt with the highest interest rate first. This will save you money in the long run as you’ll be paying less interest over time. Additionally, it may help to improve your credit score, as paying off high-interest debt is typically viewed positively by credit agencies.
Alternatively, if you are feeling like you will never get out from underneath your debt, you may want to pay off the smallest balance so you feel a sense of accomplishment and that it is possible.
Talk To Someone Knowledgeable
Struggling with debt can be a daunting and overwhelming task, especially without the right resources and guidance. Talking to a reputable debt relief company, such as Progressive Debt Relief, is an effective way to get help in managing debt and figuring out a debt repayment plan that works for you. Debt relief professionals understand the ins and outs of debt management, so they can help provide advice on choosing appropriate debt reduction strategies for different types of debt. With their expertise, they can help simplify the debt relief process by letting you focus on what’s important—disciplined finance management skills to improve your financial future.
Final Thoughts
Overall, using your tax refund to pay off debt can be a great financial move. You can pay yourself back with the interest you are saving and free up money in your monthly budget, as well as potentially boosting your credit score. Ultimately, making use of your tax return responsibly is key to successful financial planning. If you’re struggling with debt and don’t know where to turn, contact Progressive Debt Relief. They offer debt relief services and customized strategies which could help strengthen your overall personal finances and achieve freedom from debt.
