Author Topic: Best use for my $4,400 tax refund?  (Read 2282 times)

CC50

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Best use for my $4,400 tax refund?
« on: February 28, 2015, 08:06:51 AM »
Hi, I'm just discovering MMM and like what I see so far. I got about $4,400 back on my state and federal returns this year. Conveniently, I also have a personal loan with a balance of about $5,000, that I pay about $270/month on, and a $4,800 balance on a credit card with a 0% interest rate until May 2016. I am also the owner of a fixer-upper home, have about $62K in student loan debt that I pay about $500/month on, and have a 401k through work that I contribute about 8% to.

I'm trying to figure out how to best apply the tax refund to various debts and deferred purchases. Should I just use it to knock out the balance of that personal loan and free up $270 a month? Or should I apply about half of it towards the loan balance, thereby reducing my remaining payment term to about 10 months; use about $1,000 to invest in an index/mutual fund; and put some of the remaining towards DIY items for the house?

Looking forward to any and all thoughts/opinions/guidance. Thanks!

 

Wile E. Coyote

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Re: Best use for my $4,400 tax refund?
« Reply #1 on: February 28, 2015, 08:20:55 AM »
If I'd already maxed out retirement, I'd probably knock out the balance with the highest after interest rate.

dandarc

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Re: Best use for my $4,400 tax refund?
« Reply #2 on: February 28, 2015, 08:21:49 AM »
Interest rates on the loans?

Will you be able to pay that credit card off by May 2016 without this money?

Spork

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Re: Best use for my $4,400 tax refund?
« Reply #3 on: February 28, 2015, 08:24:53 AM »
While you're thinking about it... update your W4!

You may have some one-time special situation that gave you an unexpected huge refund, but if you don't: you're giving a big interest free loan to the government.   You want to aim for approximately 0 pay in and 0 refund.  (I figure if I am +/- $200, I'm about right.)

dcunitedfan

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Re: Best use for my $4,400 tax refund?
« Reply #4 on: February 28, 2015, 09:06:28 AM »
If it were me, I'd retire most or all debts (except the mortgage) before looking for investment opportunities, paying off the highest rate loans first.  Based on the information given, I'd start with paying off the personal loan, then the credit card (before the 0% rate expires if possible), then student loan (extra payments that is - presumably you have a mandatory monthly payment already).  Maybe once you've made headway on the student loan it might make sense to divert some money into pretax investments, depending on how the risk/reward options look by then.  For that matter, depending on how much you have saved as an emergency fund, it might be sensible to increase that amount.

Why get rid of debts? Basically the way I look at it, debts reduce your options now since they are obligations on future earnings - money that can't be saved, or spent on other things like home improvement.  The interest you pay on them isn't good either, but the debt itself tends to bother me more.

frugaldrummer

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Re: Best use for my $4,400 tax refund?
« Reply #5 on: February 28, 2015, 05:01:08 PM »
Some questions:
 - what is the interest rate on the personal loan?
-what have you been paying on the credit card?
- what kind of DIY projects does your house need?

You could pay off the personal loan, then start applying that 270/mo to the credit card. However that would only pay off about $3200 before the high credit card interest kicks in. If the personal loan has a better interest rate than the credit catd will have, you might actually be better off paying off the credit card now. It all depends on the relative interest rates and if you think you can pay the card off before May 2016.

As for the fixer upper....if you need a new roof, and delaying is likely to cause damage to the house, you should spend the money on the roof. But if there are just cosmetic fixes, wait until you have paid off the personal loan and credit card .