“Dear Steve,
I owe $8000 dollars from one credit card. I don’t really owe any significant amount from the other credit cards I have. I’m expecting to receive about $8,000 from our income tax refund, should I just use all of that to pay my debt?
I was thinking of saving the $8000 refund instead in case we need it in this kind of economy we got right now, and just slowly pay down our debt with my husband’s salary ( I don’t work). I’m not sure but I think the interest on that credit card is 7-9 percent and it’s fixed.
Anna”
Dear Anna,
If you are getting that big of a tax refund you should look at increasing your withholdings so you get more in your check each month instead of a lump sum at the end of the year. I bet you’d enjoy that.
You ask an excellent question. On one hand, with the economy the way it is, $8,000 cash in the bank would be a nice cushion in case something happened. On the other hand, having no credit card debt would be sweet as well.
Actually I think that paying off half the debt and putting the other $4,000 in a savings account is the best of both worlds. It reduces your debt and gives you a bit of a cushion. If you change your withholding to break even at the end of the year then you can use the extra $667 in your paychecks each month to pay the debt off faster. In fact you’ll be debt free in three or four months with my strategy and have cash in the bank.
Make sense?
Steve
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