The New Year is here, and by the end of January, you should have received all of your income, interest, and other documents which you will need in order to file your taxes by April 15. If you are lucky enough to be receiving a tax refund, there are a few ways this money can be utilized to get you out of debt sooner. And the best part is, you don’t have to increase your monthly budget to realize the same end result. Here are some ideas for making the most impact in reducing your debt:
Make an extra principle payment on your mortgage
A house is one of the largest purchases that a person makes in their life. With this asset, comes the largest chunk of debt that most people take on as well. Yes, the idea of taking out a loan for 30 years can seem a bit overwhelming. When you look at the purchase price of a home as compared to the actual cost of the loan (all monthly principle and interest payments), you quickly realize the impact of interest. For instance, if you buy a home for $150,000 at an interest rate of 5% and take out a 30 year loan, your monthly principle and interest payment would be $805.24. The actual cost of the loan, though, over the 30 year payment period is $289,886.40, almost double the purchase price! Let’s assume that you will get back $1200 tax refund; applying that to your mortgage each year doesn’t change your monthly budget in any way, but it will save you approximately six years of mortgage payments and over $30,000 in interest! Use an online mortgage calculator to figure out how much you can save on your mortgage loan.
Pay down credit card debt
The average household has just over $15,000 in credit card debt. While this amount may not seem as overwhelming as a mortgage loan, it can certainly cost a family a lot of money in the long run. Credit card debt is revolving debt, which means that interest is calculated daily, based on your average balance. A monthly credit card payment is also calculated based on the balance in the account, usually around 2%. So as your balance decreases, so does your payment, which means that credit card debt can hang around for quite a long time. Depending on the type of credit card you are using, your interest rate could be over 20%. Revolving debt is difficult to calculate because of the changing average balance and the daily compounding, but there are credit card payment calculators to help you figure out how long it will take to pay off your debt. Be aware that it assumes a constant monthly payment though. Utilizing your tax refund to pay down the balance of a credit card can make a big impact on saving interest payments and getting debt free.