“Dear Steve,

I’m a 39 year old single-mom of two, who makes about $30,000/yr. I currently have credit card debt of about $7800. No savings. No 401K.

I usually get a tax refund of around $4000. So, my question is, do I pay off as many credit cards as I can with the refund or do I bring the balances down as much as I can, put some money in savings and come up with a re-payment plan for paying off the credit cards?

Cassandra”

The Answer

Dear Cassandra,

Wait till you see how simple this is going to be to change your finances for the better.

The underlying issue here is that your tax withholdings are out of whack. You are having far too much taken out of your check each month, when you really need it, if you are expecting such a big refund back.

Letting the government use your money for free when you could be using it to pay off expensive debt is something to be avoided.

I would suggest you put $2,000 in an emergency fund and use the other $2,000 to reduce your highest interest rate debt. If you then go to your HR office and get your withholdings adjusted so you will break even on your taxes at the end of next year you’ll put about $333 extra in your check each month. As long as you can leave a good balance in your emergency fund and not put more debt on the credit cards you can pay off the rest of the credit card debt in less than two years.

Big Hug!

Get Out of Debt Guy – Twitter, G+, Facebook

If you have a credit or debt question you’d like to ask just use the online form.