Let Uncle Sam help you pay off $5,000 in debt
Take the money you're lending the government and apply it to debt instead.
Think you don't have any money to pay down debt? If you're an average American, you may have more than you think.
Much of what I've done for the last 20 years, in both books and news stories, is talk about debt -- specifically, why you should avoid it and how to find the money to destroy it. Most of the money I suggest harnessing for debt destruction comes in dribs and drabs from doing things like smart shopping and avoiding dumb deals. But sometimes there's something big you can do.
This is one of those times.
Watch the following 90-second news story I just did on how Uncle Sam can help you destroy close to $5,000 of debt over the next year. Then meet me on the other side for more.
Just to make sure you got the concept, here it is again in a nutshell:
- Take your tax refund for 2009 and apply it directly against your credit card or other debt. If you're the average taxpayer, that should amount to about $2,400.
- If you're not expecting your income tax situation to change this year, head to the IRS withholding calculator. See if you can get a bigger paycheck by legally increasing your personal exemptions, thus having less withheld. (Note: The key word in the preceding sentence was "legally." Overwithholding can put you between a dog and a fire hydrant.)
- File a new W-4 with your employer and get a fatter paycheck.
- Put every dime of that newfound wealth against your debts. If you're the average taxpayer, that should amount to $200 a month.
Grand total: $4,800 less debt in 12 months with little sacrifice, because you're essentially using money you were already putting aside. You just stopped lending it interest-free to Uncle Sam and started using it for a higher purpose.
This strategy will obviously help destroy your debts. But just to drive the point home, let's see exactly how much.
Let's assume you have a $5,000 balance on your credit card and you're paying 18% interest and making minimum payments (the interest, plus 1% of the balance). Here's what your future looks like:
- Time to pay it off: about 23 years.
- Total interest: about $7,000.
Now assume you use the tax refund method. Here's what that would look like:
- Time to pay it off: 15 months.
- Total interest: about $300.
So there you have it: If you apply your $2,400 tax refund and then find an extra $200 a month, you can save close to seven grand.
And if you don't have a $2,400 tax refund heading your way and/or can't modify your W-4 to find an extra $200 a month? Find it elsewhere by checking out other tips right here, at Money Talks News or elsewhere. You've seen what extra money can do. Do your best to find it.
Because whether you can get Uncle Sam to help or not, destroying debt will put thousands of dollars into your pocket rather than your banker's. It's just that simple.
Related reading at Money Talks News:
Why would i want to change anything and risk owing the government at the end of the year? Why not just take this year's return of $2400 and next year's return of $2400 and basically wipe out the debt in 2 large payments. I am sure that paying the minimum through the year will knock out the other $200.
i have the solution for almost all our issues at hand:
instead of giving our hard earn tax money to crooks they need to do this:
pay every person over the age of 50; 1 million dollars to retire.
they must retire to accept the payout.
now there will be about 35 million new jobs - job crises fixed
they must buy a new auto - auto industry fixed
they must buy a house or pay off there notes - housing & fixed
they must pay off there credit cards - banking fixed
this will get thing going again and you would have a lot of happy retired people and lot of happy people getting new jobs!!
Well that kind of sucked, I thought they were going to give me some big revelation about a government debt program or something.............not tell me how I can just pay in less Federal tax per payday, doesn't everybody already know that?
I personally think that most of us would rather have the lump sum refund at tax time. For most people I know, tax time is the only time of the year that they have any extra money; therefore all of their big purchases/and debt payoffs occur during this time. Also, smaller amounts of money (like the 200 per month) are not well spent, and seem to "disappear" in everyday expenses............or they do for me at least.
Seriously though, as an accountant ( and someone who underpaid federal taxes one year!) I can attest to this: Change your withholding at your own risk. Make sure you are paying in enough tax, or refund time will not be so fun for you.
I'd normally agree with Mr Johnson-- usually there's no point in giving Uncle Sam an interest-free loan.
But on today's interest rate climate, money in the bank is a tax-free loan as well-- interest rates are barely above 0%.
Decreasing withholding will put more money in someone's pocket, which they are more likely to fritter away without thinking of it. In that sense, the extra withholding is like a forced savings account (earning exactly 0% interest). So in that sense, it's probably better for many people to be over withheld-- then take that check and pay down that CC bill! It's like the old "Christmas club" accounts at a bank-- but this one's an "Easter Club".
In short, the benefits of an automatic savings is probably greater than the benefit of having more $ in your paycheck.
(This assumes that they don't do one of the most idiotic things on earth, and that is to get a "refund anticipation loan", for their refund).
Of course, a disciplined person, who will really take that extra 200 to pay off CC should do it--though perhaps that kind of person is less likely to be carrying a balance in the first place.
Wow, all of you writers taking potshots at the journalist really ought to get a life. I too am a professional tax preparer/accountant and I can't even begin to count the number of people who need these articles that Stacy makes. So many people have no clue how to save money, budget, pay down debt, live within their means, etc. And so many of them think that a large tax refund is a bonus to go buy more stuff. I counsel my clients and give classes on these very things and most of the people act like this is the first time they ever heard of such things as "not loaning uncle sam money", using the extra money in your paycheck to pay down debt, etc. No, their mantra is consume, consume and more consume. Now that many of them have lost jobs and have to figure out how to live on less they are beginning to listen to me when I try to help them budget, pay down debt, etc.
So to all of you who are so critical of such good advice, if it doesn't apply to you, then don't respond. Duh.
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