We have an acquaintance in his late 30s—early 40s that has a credit card balance too large to pay off all at one time, so monthly he is carrying over a balance on which he is paying approximately 25% annual interest rate.
We all know that there are many folks who do the same; however, in this situation the plot thickens. Each year when he and his wife receive their income tax refund, they treat it as what we call ‘found money’, spending it on whatever is on their wish list rather than either addressing their needs list or reducing their credit card debt and the attendant high interest rates.
How about Vacations/ New furniture/Autos/Hobbies? Sounds like easily justifiable gratification, whereas paying down debt is b-o-r-i-n-g—no fun.
Get a good deal for a trip to Jamaica that you can pay with your tax refund? Whoops, think about the beach and sun if you wish: would it not be better to consider using those dollars to pay down the credit card debt? Hmm, sand between your toes versus 25%? That’s as close to a no brainer as we can think of.
Found dollars are not only from tax refunds, they may come from bequests, gifts, awards, et al... Whatever the source, unless there is a critical need such as health, if high interest rate obligations are outstanding they should be the first priority.
It’s a situation in which doing the right thing pits the rational against the emotional. Not always easy as we remember from our earlier years, but once learned and employed, it can make a positive difference in one’s finances.
As the tax rules and regulations (and myriad interpretations) are rolled out, we will monitor them for their impact on your investments.