Using Your Tax Refund for Debt Management

Look at that refund check as the first big step in a new way of managing debt and your finances.

1. First of all, do you have an emergency fund? At a bare minimum, you should have $1,000 in cash sitting in an emergency fund account in case of a genuine emergency, like an automobile repair or a sudden job loss.  Make sure you have that before anything else and refill it if you ever find yourself using it for a real emergency. For larger planned expenses, consider a sinking fund.
2. Next, make a debt repayment plan. Take all of the debts you have and figure out the balance and the current interest rate on each of them, then order them by interest rate with the biggest interest rate coming first on the list. Your goal should be to make threefold: don’t increase any of these debts any further, make the minimum payment on each debt on the list each month, and make a double payment on the first debt on the list each month (you can skip the double payment if you need to refill your emergency fund that month).
3. After that, keep track of every dime you spend for a month. Keep every little receipt and, if you don’t have a receipt for something you spend, write it down on a slip of paper and keep it with the receipts.  At the end of the month, sit down and look at every dime you’ve spent. Go through the credit card bill and the bank statement as well so you can see where your money is really going.
4. Mark all of the unnecessary expenditures and make a list of just those things that you didn’t really need to buy.  Strive to cut out just 25% of those – or, if you’re feeling brave, go for cutting out a bigger slice.  If you spent $1,000 on unnecessary stuff during that month, shoot for $750 the next month. Then just cut out the stuff that’s relatively unimportant to you. Just keep an eye on your unnecessary spending for the month and strive to keep it under that target. This alone will make sure you have the money to make that double payment each month.
5. Use that tax refund check to get this plan started right.  Make an emergency fund out of it or use it for a big payment on your worst debt. Trust me, it will feel really good to start heading in the right financial direction, and this tax season can be the start of that change.

[Image: 401K, via Flickr, 401calculator.org]