In yesterday’s post, I listed 25 ways to allocate your tax return to increase self-reliance, which is at the core of homesteading. This was not an exhaustive list, rather a starting point, especially if you are new to all this.
Out of all the twenty five items I listed as a good use for your tax return, if I had to pick one that I placed more importance on than any other, it would be to reduce/eliminate debt. I can’t tell you what to do, But if it were me, and I had a few thousand dollars coming in all at once, and I had outstanding debts, that is what the money would be allocated to first.
Our culture relies too heavily on debt. It’s expected that you will grow up, get a credit card, an auto loan, a mortgage, and almost always a student loan. A person may also end up with unsecured personal loans and store credit cards. That’s a lot of interest payments. Why take that on? Simply because that’s what most people do?
What would happen if you were laid off, fired, became ill, or had to take a cut in wages or a cut in hours? Would you still be able to make your car payment? Or worse, would you be in danger of not making your mortgage payment?
A mortgage seems to be the debt most people are comfortable taking on. This is not without reason. Usually, the interest rate on a mortgage is lower than other forms of loans, there are tax benefits that offset some of the expense of having a mortgage. It is also very challenging for most people to save up enough money to buy a house with cash. It’s the most socially acceptable and anticipated loan, yet it puts the homesteader in the most precarious position of all. Obviously, if you can’t pay the mortgage, you lose your homestead, and all your hard work. That would be heartbreaking!
A credit card can be just as debilitating, especially if you are saving up to buy land, or a new vehicle, and so on. The interest is almost always very high, and credit card companies have all manner of fees they are ready to tack on in a New York minute. And while a low minimum payment may be nice, all the charges and interest may add up to within one dollar of your minimum payment. In essence, that minimum payment will take decades to pay off, while you pay out money in fees and interest.
Car loans, well, if you don’t pay your loan, the bank will send someone to repossess your car. You will no longer have a convenient way to get to and from work (assuming you work outside the home), or run your errands. Student loans are even nastier. If things really get THAT bad and you file bankruptcy, you cannot be absolved of your federally-backed student loan. Sure they will allow you to defer payments (just watch that interest accumulate during deferment). Eventually, however, they will put a lien on your homestead. It’s probably a good idea to just not own the government any money, and leave it at that.
Enter onto the scene, your tax return. Everyone’s circumstance will differ, and some may only get back a few hundred dollars, while others are returned several thousand dollars of their money back. Your circumstances will be unique to you, so you will have to decide how to allocate the funds. This is your opportunity to get a real leg up and pay down some principal and reducing future interest payments.
There is no mystery in how to pay off debt:
- Do a budget.
The budget is your road map. Without it, you really can’t move forward. You need to know what you take in each month, and what goes out each month. This allows you to plan for additional payments to principal on a loan. You always need a plan. That plan starts with a household budget. If you have already done a budge in the past, do a new one. Odds are, if you’re reading this, you either need to review your finances, or you’re a good friend humoring me by reading my blog.
- Pay your bills on time.
Paying your bills on time prevents unnecessary fees and late charges being added to your bill. Why volunteer money out the door? It might only be $5, but it could also be $25. What if you have several bills that you pay late one month? That can add up to a lot of money walking out the door needlessly.While I would prefer to see you ditch debt, if you do need to take out a loan, having a history of bills paid on time will often get you a lower interest rate.
- Pay more than the minimum due.
So crucial- if you only pay minimum payments, depending on your terms, you may end up only paying $1 towards your principal balance! You will be paying that off for years. Once you do your budget, you will see how much money you have left after your bills, and how much you can afford to put towards a payment to principal. Use a loan calculator, like those found at Bankrate.com, to see just how much money you are actually paying in interest when you make minimum payments, and how much faster and less money you pay, even by adding only an extra $20 to that payment.
- Snowball your debt payments.
This strategy is most often associated with Dave Ramsey and I suggest you check out his web site. When you do your budget, and you see which loans are costing you what amount each month, you will put each debt in order of which you want to pay off first, second, third, and so on. Once you pay off Debt #1, instead of putting that money towards something frivolous, put it towards Debt #2, on top of the amount you were already paying towards Debt #2.How you order your bills to pay off is up to you. You could choose to order them from smallest about owed to largest, in order to use the momentum of paying off small debts quickly to keep you going. You could alternatively choose to pay them off in order of highest interest rate to lowest, in order to pay the least amount of money in interest possible. Make good use of the tools at the Bankrate link above to verify your math! Yet another method of ordering your bills might be in order of personal importance. For example, if you are concerned about losing your job, and losing your home, perhaps you might want to put your money towards paying off the mortgage. However, if the idea of the federal government breathing down your neck for the next ten years because of a student loan bothers you, put that at the top of the list. There really is something to be said for peace of mind.
- Use your tax return to whack out a significant chunk of debt all at once.
Nothing quite feels like calling up a creditor and saying, “I need a payoff amount as of today.” I’ve done it, and it feels SO good! I know it’s easy to justify spending the money on something else, especially if it’s something else you need. But, if you pay off a bill and eliminate that payment entirely, won’t it be easier to save up for that other purchase? That way, you get both the “something else” AND pay down your debt. Do this whenever you get a lump sum of money- yearly bonus, tax return, birthday, and so on. Give yourself the gift of living without debt! Nothing feels better than freedom.
I know I’m going to take some flack for saying this, but I view almost all debt as a bad thing. There are times, however, where taking on debt is a calculated risk that often works out. Examples would be taking out a loan to start a business, or to buy a rental property. Another time where it might make sense to take on debt would be to buy a house, where the mortgage is actually less than the rent in the area, especially if you can also produce any of your food, heat, etc., which further reduces your monthly expenses.
It really doesn’t matter how you accumulated the debt. What matters is that you get out of it, even when it is a calculated risk. Let that tax return give you a major boost out of it.
Tomorrow’s blog post will be about increasing income, so I didn’t touch on that part of the equation here. You can absolutely raise the funds to help pay off debts, or for any other goal you have in mind. Until tomorrow!