If you're expecting us to say, "pay down your debt," then you're halfway there. But there are a few things you should do before you allocate that money, to make sure you do so in a smart and efficient manner.
Two people who receive the same amount in their refund may not have the same priorities, says Jeremy Kroll, partner at A. Farber & Partners. He suggests taking a look at your financial situation and even personal relationships before spending the money. Start by determining whether your financial situation is stable and looking at your debt load.
First, take a look at your regular, everyday money flow. Is your job in danger or is your job secure? If your job is secure, then your cash flow is pretty good and you don't have to prioritize your emergency fund. (On a side note, you should always have one, though.)
How much debt do you actually have? This includes good and bad debt -- so that credit card bill as well as your mortgage. Then look at each debt and determine the most expensive debt -- i.e., the debt with the highest interest rate, not just the highest principal.
Is there a particular debt that's causing bad feelings in your relationships? Are relationships with your partner or a family member being affected by it?
If you're stable
If your financial situation is stable, then pay off your most expensive debt first. Kroll does add a caveat. "There's a 'but' there," he says. "If it's affecting family, then pay that off first." He also suggests paying off any "grumpy creditors" quickly so you can get them out of your life.
If you're unstable
If your financial situation is unstable, Kroll suggests first paying off the debts that won't be forgiven, like car loans and mortgages. Remember, consumer debt can be negotiated and sometimes forgiven, especially if you end up in a bankruptcy situation. Once you're dealt with those debts, then you can start looking after your most expensive debt -- once again, usually consumer debt.
It's not as sexy as a new pair of shoes or a fancy night out, but that feeling of pride in your financial accomplishments will last longer than an overpriced meal.
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