A financial windfall like a tax return is always exciting to receive, since usually, more money means more possibilities, and ideally, less stress. But how should you really put that extra cash to good use? Though saving or investing all of the money might seem like the most responsible thing to do – because what is more prudent than saving? – first consider how much interest you are paying each month on any debts you may be carrying. That interest will quickly cancel out any of the financial benefit you may reap from putting your new wad of cash into a savings account or investment.
So, what should you do instead?
You could look at your windfall as a great opportunity to pay down your high-interest debt. Credit card debt, or payday loans, are generally the best target for some of these financial resources, especially since those interest rates are generally over 6-8% and usually even higher than that. Even just paying off the cards with the smallest balance first can feel like progress and keep you motivated. Once you’ve paid off a card with a small balance, cut it up, cancel the account and that’s one less problem to deal with. Starting small also means that once your small debts are taken care of, you’ve already freed up some funds for tackling your larger credit card debts next.
Though it may be tempting to use your entire windfall to pay down as much debt as you can, you might also consider keeping some of those funds in reserve for emergencies like an unforeseen but essential purchase (especially if you own a home, a vehicle, or both!) Though it may seem easy to throw future emergency purchases on a credit card (since you just paid it down with part of the windfall, right?) future-you will be glad you have that emergency fund, especially since it means avoiding even more credit-card interest.
Say you’ve used the windfall to pay down some of your debt while keeping some of the funds in reserve. That’s great! Now that you can breathe a bit easier, why not make a plan to stay that way? Luckily, there are a number of steps you can take to manage future debt by adjusting your habits going forward, such as:
Setting reachable goals for your monthly payments. The more you can pay off monthly, the better, but paying even $5 more than the minimum amount is a great start.
Being mindful of putting future purchases on your cards. Pay with cash or debit as much as possible, and think of a purchase made without the looming risk of credit card interest as a way to also buy yourself peace of mind.
Looking at your budget to see where you might be able to trim expenses. Track your spending to see where you can distinguish between needs and wants, or figure out more cost-effective alternatives for every day necessities (like your lunch or morning brew – a bag of healthy snacks from your fridge and a thermos of coffee brought from home will go a long way, savings-wise!)
If this all seems overwhelming, or if you aren’t sure how best to go about paying down debt and figuring out a budget that works for you, you can always seek professional advice. Call the experts at LCTaylor to learn about all your all your options. We can help you put that financial windfall to good use, so you can really enjoy the long-term benefits of that extra cash.
LCTaylor Licensed Insolvency Trustees
www.lctaylor.com
