Many of us are hearing about a tax rebate package the Federal government is mulling over. Or, maybe you are looking forward to a fat refund check on your taxes. Either way, here is a strategy I have been contemplating for this year. The idea is simple: the problem with debt isn’t paying it back, it’s paying it back on time. Yeah, we don’t want to keep big balances around, but what really kicks most people in the butt is when they make a late payment and end up with late fees and a large interest rate. So, why not learn to build in time into your accounts? That’s what I’ve decided to do with this year’s tax refund.
Mostly, what I’ve done in the past is pay off debt that I’ve accumulated in the past year in one fell swoop. However, I was thinking that I’ve become disciplined enough to employ a new strategy in order to buy something that we never seem to have enough of: time. I am going to take the same amount and put it in an interest bearing account. Then, since I only carry a low-interest credit card, I will continue to make my monthly payments with an additional lump taken from this account. What this does is it will buy me time, in the event that I have some other emergency down the line.
Here’s the strategy I’ve devised. Say I have an extra $2000 and I want to put it all towards debt. Instead of paying the debt off at once, I will divide this amount into say five payments of $400 each. Then, I will continue to make my regularly scheduled payment PLUS $400. I will devote it to one debt in particular and that way, I should be able to not only knock-off a large amount of debt, but I also buy time ON MY OTHER BILLS. See, knowing that I have this extra cushion around will keep me from feeling like I am living paycheck-to-paycheck, a huge psychological advantage for the cost of my credit card interest rate (which is really low). If I even put the money in an interest-bearing account, the interest on the account might pay off the interest on the card, and it’s a complete wash. The only thing that will change is my perception of how much money I have as a backup cushion, should something go wrong. This builds up trust and confidence, even though I have not changed the actual amount of money I am playing with or have.