Yesterday, I shared part one of what to do with your tax refund. Today, I would like to offer another suggestion of what to do with your tax refund. One of the most important things following the first suggestion of opening an emergency fund is paying off debt.

If you are carrying high-rate debt, reducing or eliminating your balance can save you a bundle in the long run. It makes no sense to save money at 3-4% when you are paying anything above 8-10% or more in interest on your debt.

What are the benefits of paying off debt? For one, you are able to sleep better because you are not worrying about how to pay your bills. Second, your credit score should improve. Third, the money your are not sending to the credit card companies makes it alot easier to "pay yourself first."

How much money can you save by paying off debt? Take a look at this example:

  • Credit Card Balance: $2000
  • Interest Rate: $18%
  • Monthly Payment: $50
If you continue to pay only the minimum payment, it will take you over 62 months before the bill is paid off (assuming no new charges). Not only will it take you over 5 years to pay off the debt, you will pay over $1000 in interest. If you use $1000 of your tax refund and apply it to the debt and then continue to make the minimum payments, you will be out of debt in about 24 months and pay less than $200 in interest.

Follow this link for a great list of debt calculators to figure out how long and at what amount you need to get out of debt.

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  1. Noel Larson // January 25, 2008 at 5:18 PM  

    Good advice!

    Doing your own taxes, unless you have weird deductions or lots of lifestyle chages are a good way to save money. And you won't be tempted by a Rapid Refund Rip-off