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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 this 90-second news story, 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 $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.
- File a new W-4 with your employer and get a fatter paycheck.
- Put every dime of that new-found 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 currently 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 can find an extra $200 a month, you can save close to 7 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 in our Ways to Save category or elsewhere to find the extra money. 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.