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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.

By Stacy Johnson Feb 2, 2010 5:35PM

This post comes from Stacy Johnson at partner site Money Talks News.

 

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:

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