Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective
03.22.2009
Money

Creative Commons License photo figure credit: borman818

I have just about wrapped up our tax return for 2008 and it looks like we’re getting a pretty sizable refund. This poses two questions: What should we do with the refund?

and

Should we change our withholding to avoid getting such a large return next year?

This post is about the first question, and the second will be covered in Part II.

ScrapperMom and I talked for a while about what to do with the refund. Given the current economic climate and the fact that our emergency fund only has about 3 months worth of expenses in it, we considered simply saving the money. It would add about another 1.5 months to our e-fund. This would give us some extra security, but would not help us to reduce our monthly obligations at all.

The other option is to use the refund to pay down some of our other debts. We’ve got a mortgage, car loan, and low interest, fixed rate credit card. Throwing it at the mortgage would be decidedly unsatisfying for two reasons: one is that it represents about 1.5% of our balance, so I’m not sure it would even qualify as a dent. The other is that it locks up our cash, at least until we sell our house — and we have no short term plans to do that. The credit card debt is the result of a renovation that we made to our rental property, and represents a deductible business expense. The tax refund will pay about 2/3 of this debt. With the low interest rate and the tax-deductibility making the effective rate even lower, low monthly payments, and the inability of this payment to provide relief from our monthly minimum obligation, this is also an unattractive option.

The last option is the car loan, which has about the same balance as the credit card. This loan is through our credit union. We bought our van a few years back and stretched a bit for it. We did save a lot of money by buying lightly used, but we took a 6 year loan on it to keep the payments manageable. Since then we have been pre-paying by about 10% each payment, as well as throwing some extra money at it here and there. So far we have shaved over a year off the loan. An interesting thing about this loan that I have not noticed on other loans is that as we pre-pay, our next payment due date keeps getting pushed out. So according to our latest statement, our next payment isn’t due until next year. The nice thing about this is that if we find ourselves in a position where we can’t make the minimum payment on this loan, we can skip it for quite a while by pre-paying now. The same is not true for the mortgage or credit card: if we pre-pay, we’re still obligated to make the minimum payment EVERY month.

ScrapperMom and I have decided, therefore, that the best option for the bulk of our refund is to pay down our car loan. This will cut another year off of our loan, reduce the number of payments left at our present paydown rate to just over 6, and still preserve the security of knowing that, if we lose some or all of our income, the obligation to pay this loan is pushed back far enough to help keep us solvent while we find ways to replace that lost income.

What do you think? Is this the best of both worlds? Are you getting a refund? How will you spend or save your refund? Share your thoughts in the comments section below!

4 Responses to “2008 Tax Return, Part I”


  1. jolyn Says:

    I would definitely go with the car loan as well. Of course, interest will continue to accrue as long as there is a balance, even if no payment is due. Getting rid of that balance and payment will be huge.
    Our tax return was going to go toward debt; but unfortunately I think it will have to go toward our son’s braces instead … so that that doesn’t become a debt!


  2. MITBeta Says:

    Hi Jolyn and welcome. Interest always accrues… we can count on this almost as much as death and taxes, right? I’m okay with that hedge, though, since after applying our tax return, the balance will be pretty darn low, and with an already relatively low interest rate, the monthly accrued interest won’t be that great.


  3. Anon Says:

    Prepaying your car loan–not such a great deal the way that you did it. You are giving the car company an interest-free loan. Far better to make a big *principal* payment that will reduce your future interest and will not let you postpone future payments. Auto loan companies don’t make it too easy to figure out how to do this, usually. I had to call my loan company and get a special address from them in order to make a principal-only payment.


  4. MITBeta Says:

    This loan is held by my credit union, not an auto loan company, per se. I know for a fact that my pre-payments have been going to principal in the correct proportions, so I don’t think this caution applies to me, though it may apply to others. Thanks!


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