It is that time of year again. Between now and April 15th tax returns are filed all across the country. The average tax payer last year received a $3,000 refund. What will you do with your refund this year? If you are struggling with your finances here is what we suggest you do with your refund this year.
We recommend following what Dave Ramsey calls the baby steps. The baby steps are a step by step game plan on how to get out of debt and build wealth. Below are the baby steps.
- Save $1,000 as a beginner emergency fund
- Debt snowball
- 3 to 6 months of expenses saved (fully funded emergency fund)
- Invest 15% of your income for retirement
- Save for kids college
- Payoff the house early
- Build wealth and give a bunch of it away
If you are receiving the average refund you would take $1,000 of it and fund your beginner emergency fund. This fund is for emergencies only. Think of as insurance as you are working your way to get out of debt. When life happens, and it will, you do not want to be tempted to go back into debt. Then take the next $2,000 and apply it toward your debt using the debt snowball. This is where you list all of your debts except your house smallest to largest by balance. Pay minimum payments on everything but the smallest debt and use every extra dollar to pay off that debt. Then take the money you used to pay off the first debt and put it towards the next debt. Keep repeating the process and then you will be DEBT FREE!!
As you can see, using your tax refund can be the rocket fuel you need to begin the process to get out of debt.
Credit Card Debt
How long will it take YOU to get out of credit card debt?
Did you know that the average consumer has just under $15,000 in credit card debt; along with the average interest rate of near 14%? It would then take the average consumer over twenty years to get out of credit card debt paying only minimum payments. That includes an assumption that over the next twenty years there would be no increase in credit card debt. No one wants to pay that long on their credit cards. Here is how you can get out of debt faster that just paying minimum payments.
The debt snowball (as mentioned in the previous article) is a way to get traction so you can pay off your debts faster. The average household using the debt snowball will be out of debt in two to three years. Imagine if it took you over twenty years to pay off your credit card debt you would pay just under $11,000 in interest alone. However, if you get out of debt in three years, you will only pay under $3,300 in interest. That is a $7,700 savings! To find out more about how the debt snowball can work for you schedule a thirty minute consultation today! It could mean all the difference in the world when it comes to getting out of debt.