Debt Reduction Advice | Debt Reduction Advice

The average tax return is around $2,800 according to a recent article in CNN Money. In the past, the trend has been to spend the money on an indulgence of some sort – a vacation, a gadget, a pool, a nice dinner, etc.; however, with today’s economy, many people will find that there are better ways to spend the money.

1.  Build an emergency fund.

Whether you have never had an emergency fund or you did but had to tap into it, saving your money is a good idea. When you are prepared for a financial emergency, you never have to worry about taking on high interest debt to pay for a furnace that breaks in the middle of winter or a roof that caves in.

Unexpected situations that require larger sums of money will always occur, the only questions are “When?” and “Will you have enough to pay for it without going further into debt?”

2.  Pay off high-interest debt.

Paying off high-interest debt can really make a difference in your financial situation. Imagine that you owe $10,000 on a credit card – $8,000 was spent on purchases and $2,000 was a cash advance. Your credit card company assesses interest at 7 percent for purchases and 20 percent for advances. If you paid $250 per month on the card without making any new purchases, you would end up spending almost $12,000 and it would take 48 months to pay it off.

However, if you used your extra income to pay off the $2,000 cash advance, and continued paying $250 per month, you could pay your card off in 35 months and you would pay at total of $10,630. That is a difference of almost $1,400 or 13 percent.

3.  Invest.

Put the money toward a way to pay for retirement, your child’s education, your aging parent’s health care, a down payment for a house, down payment for a business loan, etc.

While your tax refund, or whatever few hundred or thousand you have been able to squirrel away, will likely not drastically alter your financial situation, there are things you can do to work toward objectives you have or just to make your future a little brighter. Every bit helps.