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Applying the Tax Refund

QUESTION: Bryce in Ohio and his wife are trying to decide where they should put their $6,800 tax refund. They have a car with a $6,000 loan plus some other debt. They’ve considered paying off the car and selling it to buy a cheaper one. Dave doesn’t think their car is too much compared to their income.

ANSWER: I don’t think this car is out of your price range. You’ve got the money to pay it off. I would pay it off and keep working your debt snowball. The rule of thumb we use is if you can be debt-free within two years not counting your house. In this case, yes. Also, does the value of your vehicles add up to be more than half of your annual income? If they do, you have too much money tied up in things going down in value. That’s not the case here.

The car isn’t your problem. The problem is that you just started this fight. Adjust your take-home pay. That big of a tax return is not something you want to get. You’ll get some on unearned income tax credit, but adjust your W-2.

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