stackbills.jpgRight about now you are either dreading filling out your taxes or anticipating a fat tax refund. There are times in our lives when we know we’ve got money coming to us. Before the money actually lands in our hands, that’s the time to make plans on how to effectively use this additional income. Times when income might be increasing predictably are tax time (refunds) and pay raises. Whether you expect an additional $100 a month or a fat $2,000 check at the beginning of the year, now is the time to have a plan to build wealth and reduce debt – before your increase is frittered away.

Eliminate Your Debt

Experts all agree, if you are in debt then this should be your priority: eliminate the debt. Of course, there are some forms of debt that aren’t as damaging as others. Mortgage debt is a great way to reduce your taxes since the interest is tax-deductible. Student debt has very favorable loan repayment terms. Typically, you want to target debt with high interest rates or that can adversely affect your FICO credit score: car loans, credit cards, and payday loans. These should be your top priority. A tax refund is a great way to remove excess debt in one fell swoop. But, what about if you just have a regular pay increase?

Pad Your Emergency Fund

Even though you are in debt, it doesn’t mean you shouldn’t save either. Set up automatic deposits to savings for the difference between your old paycheck and the new amount. You won’t even feel the difference and you will slowly be resuscitating your emergency fund back to full health, while paying off debt with other increases like your tax refund. If you know that you are expecting a large maintenance bill in the future, seek to put additional funds in to cover these expenses ahead of time. And, don’t forget to insure other assets that seem fine, but may end up getting damaged through accidents as well as being worn out.

Insure Your Assets

This category includes your own body. Without health, wealth is meaningless. If you don’t have health insurance, then this should also be something to do to help keep your expenses down. Having health insurance can keep you from going bankrupt from unexpected medical expenses. Insurance on your car can keep your expenses down in case of an automobile accident. House insurance allows you to rebuild if your house is damaged in a fire.

Snowball Your Payments

What happens once you have your emergency fund in place, many of your debts reduced and your insurance taken care of? Well, that’s the perfect time to start snowballing your other debt payments. If you paid off one credit card, take the amount of money you used to pay on it and add it to your payment on any other outstanding debt. This way you pay off the balance much quicker and are well on your way to being debt-free and wealthy.

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