Every year as tax season approaches I hear family and friends start discussing what they plan to do with their federal tax refunds. Some plan to go on shopping sprees or pay off debt, while others plan to put it away for a rainy day. My husband and I usually try to do a little of all three, but this year we are dedicating it all to paying off debt. These are the debts we are paying in full with our federal tax refunds, how much it will save us each month, and what we plan to do with our savings.
In July of 2012, my husband and I set out to pay down our auto loan, so that we could have it paid in full by the end of February 2013. Our base monthly payment on our loan was around $310 a month, and we chose to bump that payment up to $360 a month, which would leave us owing around $1,400 by the time February rolled around. Now that February is here, we are right on track with our goal of paying off our auto loan. We plan to use our federal tax refund to pay the balance in full, which means we will be saving at least $310 a month, or $3,720 a year.
In early 2012 my husband and I paid the balance on my credit card in full, which left us owing on his. We started focusing on reducing his $2,000 debt right away by increasing our monthly payments by $30 or more a month, and were able to lower that debt to around $1,200. Using our refund to pay off this debt will save us at least $100 a month, or $1,200 a year.
What we are doing with the savings
Paying these bills in full will add at least $410 a month back into our budget, which is just $90 shy of our mortgage payment. We plan to use that extra money to make additional principal payments on our mortgage, to add to our savings, and to start a savings account for home improvements.
Paying an additional principal payment of $80 a month will reduce our 30-year mortgage by 12 years, which means paying off these two bills will continue to reduce our overall debt. Also, by using some of this money to make improvements to our home will increase the value, and our overall net-worth.
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