Hi Taylor – I just filed my tax return and I’m getting about $3,000 back. I have about $10,000 in credit card debt and not a lot in savings, so I’m wondering what the best use of my refund would be. – Sydney

Hey Sydney – I’m glad to see you’re planning to make good use of your tax refund! A lot of people see the IRS kickback as free money and just keep themselves in bad financial cycles. As for savings vs. debt reduction, this is a great question with a lot of little variables.

–1. Emergency fund. The backbone of any strong financial system is a savings account that keeps you from falling into financial ruin when something goes wrong. Even if you try to pay your cards down every month, you can’t hope to achieve long-term financial freedom if you fall back into debt every time your car breaks down or you have to travel unexpectedly. The goal with an emergency fund is to have 3-6 months of living expenses stashed away. If that seems unattainable, you don’t have to get it all at once. Start small, maybe with just a portion of your tax refund. This might be your launching pad for setting realistic savings goals and getting yourself comfortable in the next six months or a year.

–2. Debt. Paying your credit cards down to zero is one of the greatest gifts you can give yourself. You don’t have that nagging worry of whether you’ve paid your bills on time, and the monthly amount that was going toward interest now goes straight to you. You know that you want the debt gone, the question is what’s the most effective way to pay it down for good? Do you pay the card with the highest interest? Do you pay the card with the smallest balance to make it go away? Do you consolidate two cards into one? There’s no right answer, as different people have different motivations. The correct decision is to do whatever will make you feel most accomplished and inspired to keep paying down those cards.

–3. The balance. If you have debt and you don’t have savings, you need to either decide between debt relief and an emergency fund or find the right balance of the two. I might be inclined to put a little more toward savings so that the safety net is better prepared to catch you. If your savings aren’t empty and there’s one card with a $3K balance and super high interest, maybe you just knock that one out. You’re choosing between two smart financial decisions, so don’t beat yourself up too much and make a choice. Hopefully this will be the first in a series of great financial decisions that will lead you down the road to wealth.

It’s great that you’re going to use your return wisely. After this, just keep making strong decisions and you’ll be in good shape. Thanks for the question!

TAYLOR J KOVAR
CHIEF EXECUTIVE OFFICER
CERTIFIED FINANCIAL PLANNER™