I can always tell when tax season is here–local stores stock up on flat screen TVs, setting up the extra boxes in the aisle to await the influx of customers with their tax refunds. In years past, my husband and I have certainly enjoyed the extra money as much as anyone–tax refunds have helped pay for a trip to England, a new computer and a piece of exercise equipment. Then, I quit my job to be a stay-at-home mom and the refund money served a more serious role: replenishing the savings that we frequently dipped into to cover unplanned (or poorly planned) expenses. For more than three years we’ve been making it work: squeak by on a very tight budget, rely on savings if we needed a little extra, and just survive until that tax refund comes in and we can breathe a sigh of relief knowing that we have bumped up our savings again. It grew tiresome. I was tired of saying “I hope your old car lasts until we pay off my car in 2013 because we can’t afford another payment.” I was tired of saying “Once my student loan is paid off in 2014 we can start saving for a trip to England.” I was tired of thinking “What if I never know what it’s like to have a little extra money?” Our budget had no wiggle-room.
My husband and I don’t have a lot of “bad” debt. I learned my lesson about credit cards the hard way before I was married. In addition to our mortgage, we have a student loan each, as well as a used car that we financed out of necessity. But I’ve come to the conclusion that just about all debt is bad. Regardless of the interest rate, regardless of tax credits or deductions, it ties up income that could be put to better use. Here I am in the midst of what should be some of the best years of my life, and I’ve been feeling like I’m treading water, just waiting until I can really start living a couple years from now. That’s just sad.
After reading Dave Ramsey’s The Total Money Makeover: A Proven Plan for Financial Fitness, I knew I wanted to get rid of our debt. I calculated that if I could come up with an extra $500 per month to throw at our loans, everything could be paid off within a year. But how? Though I was fortunate to have some flexible work-at-home opportunities available to me, the reality was that I was completely overextended as it was trying to chase around a preschooler, keep the house in an acceptable condition, planning and cooking meals, etc. etc. I couldn’t meet that $500 monthly goal and maintain my sanity, so I gave up on the idea for a while.
As I worked on my taxes this year and saw the tax refund amount settle into a final number, it occurred to me that our refund was almost identical to the balance on my car loan, our highest interest, highest monthly payment debt! What if I went crazy and paid off the balance in one fell swoop using the tax refund? I realized that if I paid off the car and then used the amount I would normally spend on a car payment to pay extra on my student loan, that too would be paid off by the end of 2012. My husband’s student loan is also due to be paid off this year. We would be looking at being debt-free except for our mortgage by the end of 2012–more than two years early! That would free up hundred’s of dollars each month to spend on accomplishing other important goals, like saving up a real emergency fund and finally traveling to England to introduce our son to the many relatives he was never met.
I explained the idea to my husband, and he was completely supportive. So, last Tuesday I walked into my credit union and asked the teller to pay the balance of my car loan from my checking account. When he pulled up the loan on his screen he looked at me in disbelief, but my mind was made up. No more car loan! Starting in April, what would have been my car payment will go toward my student loan instead. I’m feeling simultaneously triumphant, excited, and scared! We do have money left over in our savings account from the previous year–in fact, a bit more than the $1,000 that Dave Ramsey suggests starting out with. We’ve been able to get by without dipping into our savings at all for several months, and we will need to be careful with our spending to ensure that we continue that way. We are definitely stepping outside our comfort zone into unfamiliar territory, but the rewards will be great.
So, no flat screen TV for us yet–this year we used our tax refund to purchase a debt snowball, and we’ll spend 2012 helping it roll down to the bottom of the hill. Can you leverage your tax refund to do something that will change your life for the better?