Tax season is upon us. And for those who are expecting to receive a refund (or any chunk of money – like an inheritance or bonus, regardless of the season), figuring out whether to use that money to build up a savings account versus pay down (or off) debt can be tricky – especially if they want to take the most advantage of this extra money.
If you are contemplating this issue with any significant chunk of money, below are some of the most important factors to consider in order to help you determine whether to save your money or put it towards debt payments.
When Saving May Be Better than Spending
Saving more of your tax refund, bonus or other sum of money can be a smart financial choice if or when:
- You have little to no savings – Having little to nothing in your savings account can be a recipe for disaster, as it can result in you having to take out expensive loans in the event an accident happens or some major need arises. For example, if you are in a car accident and you don’t have any savings to draw from for your medical and/or car repair bills, you can find yourself quickly buried in a lot of debt.
- You know you will have a big expenditure coming up – Does your home need a new roof? Do you or someone you love need some expensive medical treatment? Or is there some other big expenditure on the horizon? If so, saving your money for this upcoming expense is another way to avoid (or limit) future debt.
- Your debts have no or minimal interest rates – Another situation in which saving can be preferable to spending money on debt can be when debts have minimal (if any) interest rates. So, for instance, if you have some no-interest or low-interest debt that you have no problem making payments on, putting your money in a savings account – especially one that may be associated with higher interest rates – can make your money go further.
When Paying Debt May Be Preferable to Saving
In contrast, you may want to consider paying down your debts, rather than investing in your savings, if or when:
- You have any debts associated with really high interest rates – The higher the interest rates are for your debts, the more expensive those debts will be in the long run to pay off. So, if you do have any high interest rate debts, focus on paying these debts down (and off) first so that you are not spending more money satisfying these debts over the coming months (or years).
- You have debts that are close to being paid off – If you are really close to paying off a credit card (or any other debt), using a chunk of money to fully eliminate that payment is another smart money move, as it can improve your credit score and reduce your overall monthly payments.
The Bottom Line
Although throwing a big sum of money at either your savings or your debt(s) can be a smart money move when you are ready to improve your financial situation, another option can be to split up a chunk of money, using part of it to invest in your savings and another part to pay down debt.
If, however, your debt has snowballed out of control, be sure to consult with a debt relief professional before making any move, as you may have better options for getting out of debt and obtaining a financial fresh start.
Contact an Experienced Denver Bankruptcy Attorney at Garcia & Gonzales, P.C.
Are you looking for real relief from serious debt? If so, you can trust the experienced Denver bankruptcy attorney at Garcia & Gonzales, P.C. to provide you with experienced help and honest answers about your best debt relief options.
To learn more about how we can help you achieve a financial fresh start, contact us today by calling (303) 839-8888 or by emailing us using the drop-down contact form at the top of this page.
When you contact us, you will communicate directly with one of our attorneys, not a paralegal or legal assistant. We welcome Spanish-speaking individuals to contact us also – hablamos Español.