What Should You Do if You Receive a Tax Cut?

The recent revelation of President Trump’s proposed tax reform plan has made one thing very apparent: if it were to go through, you would most likely see more money in your paycheck. Odds are, your tax burden would likely be reduced, and that’s a good thing for people who would like to have a few extra dollars in their wages every week or two (and let’s face it… who wouldn’t?).

But if you do get a tax break, you shouldn’t immediately run out to spend this newfound cash—there are much smarter decisions you can make. Instead, you should use this money to improve your financial status. The first thing you should do if you receive a tax cut is pay down your credit card debt.

So says Attorney David Kovari, who was recently quoted in an article on Bankrate.com discussing the dangers of the “wealth effect” that can come into effect after receiving a tax break. “When people have a little more jingle in their pocket, they tend to spend more.”

Sam Dogen of Financial Samurai says “The easiest and most responsible thing to do is take that money and use 100 percent of that to pay down your most high-interest debt.” While it may be nice to take a chunk out of another loan, such as your mortgage or an auto loan, paying off your credit card should be your number one priority due to their significantly higher interest rates that can cost you far more in the long run.

The average American owes just under $10,000 in credit card debt according to CreditCards.com, with the average interest rate sitting just over 16%. If you make only minimum payments of about 2%, that level of debt at that interest rate would take you just under seven years to pay off and cost you a whopping $6,588 in interest alone! That’s a tremendous burden to have to pay down for nearly anyone, especially those who are living from paycheck to paycheck and rely on their credit cards to fill the gap.

But if you spend even an extra $50 per month towards that bill, you’ll pay your debt down a whole two years sooner!

And to add to these woes, credit card interest rate is rising. The Federal Reserve raised rates in March, and will likely do so again later this year. That will make debt even more expensive, so now is not a good time to have a significant amount of it.

If you need assistance seeking financial relief from credit card debt and are struggling to make your monthly payments, contact the Law Offices of David Kovari, P.A. now. With more than 19 years of experience as a Boca Raton bankruptcy attorney, Mr. Kovari has been through hundreds of cases and can provide you with the counsel you need to rectify your financial situation. Here at our firm, we put our clients first at all times, and we understand the struggle you’re going through. We handle each case with the utmost professionalism, and we always make your best possible outcome our highest priority.