Tax Return - where fore shall you go?

Just finished my taxes and am expecting 1K back. Should I send it to the Toys R US nemesis card...insane interest......or pay off entirely a different credit card? 

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    • Ben Khaki Storm
    • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
    • Khaki_Storm.1
    • 2 mths ago
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    Assuming you're not behind on any other payments, and you don't have any other real expenses coming up, I'd pay off the smallest card balance first. Then you'll be able to focus more money on the next highest one every month. 

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      • bevocat
      • Sometimes, It Just Sucks to Be You
      • bevocat
      • 2 mths ago
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      Ben K. Just... why?! Why pay off a smaller balance card instead of working on the one with the highest interest rate first?! I hate flushing money down the toilet that I don't have to, even if it's only a few quarters. It makes me itchy.

      Reply Like 3
      • Ben Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 mths ago
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      bevocat it's called the debt snowball. Ramsey and others teach it. Let's say I have three credit cards A, B, C. Payments are 10, 20, and 30 and balances are 100, 200, and 300. I need a total 60 per month to make the min. payment. When I have extra say 10, where should it go? You may save a little on interest applying it to the highest interest, but it's not really as much as you think. I can explain that as well. Anyway, you put it to the lowest balance every time and find it paid off very quickly (it was the easiest goal after all). Now look at your budget and you still have 60 set aside for debt. Now your payments are 30 to B, 30 to C. A is gone and you applied its payment to B. Now instead of sometimes an extra payment you've built in an extra payment. Again extra comes from time to time and you apply it to B. You find B goes away a little quicker than A, that's the snowball effect. Next all you have left is C, but you still have 60 in your budget. You apply it to C. Now your making a double payment to C, wow now your rolling! It melts away and you've done! There's also some psychology in hitting the small goals first.

      Why did I say you're not saving much? If the highest interest card is 20% and the lowest card is 16%, then the only real savings from applying payment to 20% instead of 16% is the difference, or 4%. Keep in mind, this is on your sometimes extra payments and the rates are annual-ish. So, the difference in rates divided by 12 then multiply by only the extra payment is the savings. 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 mths ago
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      Ben K. The debt snowball is just a psychological trick, and most of us are very familiar with how it works. But it's still just a psychological trick and not mathematically optimal. In the long run paying off higher rates first will have more impact on the total cost to service your debt and you will get out of debt faster. Just because the difference is small doesn't mean it's not a difference.

      If you only have an extra $10/month to service debt above minimum payments, sure it will be insigniciant, but $10/month extra also isn't going to get you out of debt anytime soon and any little slip-up is going to consume that additional extra.

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      • Ben Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 mths ago
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      nolesrule it worked for me and the in other areas of life too (orangizing the house, etc) Much, if not all, of leadership is psychological. My whole family understood the debt snowball,  even the 4yr old, at the time. We made charts, had a little party each time one was paid off. If you spread things out too much, you never see the results add up and you get discouraged. 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 mths ago
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      Ben K. Sure, which means you need to decide between the psychological crutch vs. the mathematically optimal. Without real numbers on hand, it's impossible to calculate the opportunity cost of the psychological approach, because it is unique to each situation.

      You can always use principle reduction milestone parties to celebrate intermediate debt payoff steps if you need some encouragement.

      Reply Like 1
      • Ben Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 mths ago
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      nolesrule I don't think I'd call it a crutch, but whatever you want to call it. If it works, then why question it. The easy win idea is used a lot on business teams too. I started my debt journey in college and was very clever about 'using debt' creatively making the most with every step optimally from a math standpoint. However, I wasn't getting out if debt. I was just stuck in the mud, but I could show you how much I was 'saving'. The debt snowball is what got me unstuck. 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 mths ago
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      Ben K. crutch. Coping mechanism. Call it whatever you want. I really don't care. There are a million ways one could come up with milestones to celebrate.

      If you aren't getting out of debt while managing it optimally, you're not managing it optimally. Just a thought.

      Reply Like 2
      • jenmas
      • jenmas
      • 2 mths ago
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      bevocat I hear you on this. To me it is not a "win" to pay more in total over time just so I can cross a tiny debt off my list.

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      • bevocat
      • Sometimes, It Just Sucks to Be You
      • bevocat
      • 2 mths ago
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      jenmas nolesrule Ben K. Yep, I'm well familiar with the debt snowball, but thank you for explaining it so well for other readers who may not be!

      And like nolesrule I greatly prefer to save interest that can be thrown at the highest interest card's payoff. If you only have difference of 4% it may be a very negligible difference, so if you're still writing paper checks and using stamps to mail bills, then yes, maybe it makes financial sense to pay one off so you don't have to keep paying to mail your payment off to the smallest one. But if you have one at 23.95% and one at 6.99%, you'd be an idiot to not pay off the 23.95% one first.

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      • Ben Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 mths ago
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      nolesrule oh, but I was. If only I still had the computer with all the spreadsheets, you'd see. I think they were in something preExcel, can't recall. The problem was I was sub optimizing my time. I was so focused on the 22 cents saved, I missed the overall net worth, the slow, but ever creeping debt monster. I'd use new debt at 6% to pay off debt at 8%, I'd find out if I turn make bimonthly payments (most don't allow this anymore to hit the principle that often, but if they did the effect is almost that of an extra payment for the year). What I missed was the oversize of the forest, I was moving twigs and didn't see anything larger. I was pennywise and pound foolish. 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 mths ago
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      Ben K. You're going to have to explain better than that how you were optimizing but not reducing your debt, because it's just not possible, as it requires increasing your debt remain flat or to fall behind if you optimize your get out of debt plan. Increasing your debt, by definition, is not optimizing the get-out-of debt process. It's quite the opposite.

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      • bevocat
      • Sometimes, It Just Sucks to Be You
      • bevocat
      • 2 mths ago
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      Ben K. Well, certainly if you continue spending money you don't have, you're not going to shrink your debt, but that's true no matter what method you do to get yourself out of the hole. No matter what, you have to stop digging in deeper.

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      • Ben Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 mths ago
      • Reported - view

      nolesrule I was optimizing the payments, lowering the interest, setting the timings, weighing if I should pay early or invest (there was an online account offering 7% at the time, my loan interest was 6%, so a I gain as long as I put extra money in the online account, right) things like that. All very clever, highly researched, timed, and it all came to nothing. My focus wasn't on the overall debt, which grew despite my saving 22 cents a payment, earning 1% on 1,000, etc. 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 mths ago
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      Ben K. Once you start including options that are outside of debt reduction in your plan, you are no longer optimizing debt reduction.

      I don't think any of us were having the invest or pay off debt discussion here.

      Reply Like 1
      • Ben Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 mths ago
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      nolesrule I'm just saying I was focused on the idea of optimizing the use of money and wasn't getting out of debt. I was pennywise, but pound/dollar foolish. It all depends on the loan too, some have early pay penalties (I nicely call those people loan sharks). 

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      • Ben Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 mths ago
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      bevocat I missed the dig on stamps. Stamps are good. If you want to know, I pay most of my bills thru the credit unions bill pay service. This doesn't use my stamps and avoids e-bill fees. For example, my natural gas supplier would gladly sign me up for e-bill for a small $3.99/mth fee just for their bill. No that you! However, I've found 2 payees I deal with are not mature enough as organizations to know what to do with payments any way but stamps and mail. Call me lazy, I got tired of calling them to track down payments when it's sent any other way.

      The old me would move as much of the 23% interest to the 7% interest I could, or apply for a loan consolidation, or call up and plea for a lower rate. The current me, just says debt snowball, it's all going to be behind so fast it doesn't matter. The so fast part comes from Dave R's (getting the idea he's not liked too much here) gazelle intense time. We turned off cable, stopped eating out, stopped buying new clothes, no trips to the movies, no family vacation, sold the 'newer' car, and things like that all to get out of debt (um, the first time).

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      • Louie
      • YNAB Newbie
      • Louie
      • 2 mths ago
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      Ben K. I take the opposite view, pay off the cards with the highest interest rate first. You will get ahead faster that way by accruing less interest along the way.

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      • Ben Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 mths ago
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      Louie taking a page from the book, literally, if that works for you, then do it, and I'll do what works for me

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  • Hi Stacy C !

    Without a full overview of the debts you're facing, this is a tricky question!

    Is it just the two credit cards? If you pay off the other card, could you put any remaining amount towards Toys R Us? If you pay off the other card, could you increase your payments towards Toys R Us? If so, how long would it take you to pay off Toys R Us? If you apply the refund towards Toys R Us, how much would you have left to pay?

    You don't have to answer those questions here, but take a look at what each plan of action would mean to your overall financial picture. :)

    Reply Like
  • Not enough information, but in a vacuum, the mathematically correct choice is always pay toward the balance with the highest interest rate.

    If you are in a struggle between mathematically optimal and psychologically optimal and psychological wins out, it's better to eliminate debts on smaller balances and use the payments that were going to those to then apply toward larger balances.

    Reply Like 1
      • Saish Dawg
      • saish_dawg
      • 2 mths ago
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      nolesrule Humans fall prey to many cognitive fallacies.  The reason that the mathematically optimal approach may not be the best for everyone is that it ignores human psychology.  At the end of the day, if your optimal method pays off debt one month faster, but another method that addresses the reptilian aspects of our brain ensures that (making this up) 20% more people actually have the fortitude to pay off their debts at nearly the same rate, which is "better"?

      Reply Like 2
    • Saish Dawg Further more. Even economists now admit sentiment is just as real a driver if markets as 

      nolesrule said:
      My very first post in this thread, before diving into the deeper theoretical discussion, pointed out both approaches and said to do which one works best for the individual

       But then you continue to lecture us about why there is only one true way and other ways are *lazy* or *misguided*. If you are in a swamp draining it is less important than avoiding the crocodiles (or short  debt).

      We all need to be more empathy and understanding.

      Reply Like 1
  • Well that blew up and all I heard was the teacher from Peanuts...wah wah wah wah….. Thank you for the input....I will figure it out. LOL.

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      • Ben Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 mths ago
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      Stacy C sorry, almost quote from ynab book: go with your gut feeling. I'm half way thru the book. 

      Reply Like 2
      • WordTenor
      • Your lieutenant, when there's reckoning to be reckoned.
      • WordTenor
      • 2 mths ago
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      Stacy C Honestly, Elizabeth Warren’s advice is probably the best for your situation. What is bothering you the most? Put it there. For those of us who can’t stand the math being inefficient, that’s going to be the highest interest debt. For those who can’t stand making incremental progress, it’s going to be the smallest debt. For those who have a debt that is at 0% but it’s to a family member and this is making Thanksgiving dinner uncomfortable, it’s going to be there. 

      Pick the thing that is bugging you and get after it with focus.

      Reply Like 8
    • Stacy C Yes it is fascinating how these threads turn into 'robust discussion between evangelists and those who do what feels right to them. :-)

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 mths ago
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      Slate Blue Koala I like this quote:

      In theory, theory and practice are the same. In practice, they are not.

      Theoretical discussion never hurts, but applicability should come first when taking action. My very first post in this thread, before diving into the deeper theoretical discussion, pointed out both approaches and said to do which one works best for the individual. 😉

      Reply Like 2
      • bret
      • bret
      • 2 mths ago
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      Slate Blue Koala 

      Respectfully, "doing what feels right" is what gets a lot of folks into trouble in the first place. YNAB encourages a more rigorous approach to budgeting and personal finance.

      Reply Like 1
      • WordTenor
      • Your lieutenant, when there's reckoning to be reckoned.
      • WordTenor
      • 2 mths ago
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      Another good reason to at least occasionally get down and dirty with the theoretical is that a number of aspects of finance are not perfectly intuitive, so "what feels right" is quite likely to be wrong. For instance, right now, there is a lot of uproar in the US about people getting smaller tax returns. But what that actually means is that their tax withholding is being calculated more accurately, and that throughout the year, they have been maintaining control of more of their money instead of loaning it to the government at 0%. If all you're used to is getting a big fluffy check at the beginning of the year, though, it feels like punishment until you understand the theoretical reasons why you actually want your tax return to come as close to $0 as possible (which admittedly is also an oversimplification to make a point). 

      Reply Like 6
      • bret
      • bret
      • 2 mths ago
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      WordTenor 

      Tax refunds are a sore subject, why'd you have to use that example?!?  🙂

      Everything you wrote is 100% true, of course, but as a blue-state resident with high state income and property taxes, I underestimated how badly I would get hammered by the new deduction caps.  (My taxes actually went up in 2018 and I'm salty about it!!)

      Also, as the recent shutdown illustrated, an alarming number of Americans live paycheck-to-paycheck and have virtually no savings. For better or worse, overpaying their taxes and getting a refund in April is the only "savings" vehicle that some people have. I feel badly for anyone who was blindsided by the new law and was depending on a refund to make ends meet.
       

      But that's politics, not budgeting, so I'll shut-up now.

      Reply Like
    • bret And anyone who starts a comment with 'respectfully' or 'I don't mean to cause offence' is likely to be about to preach or do the very opposite:-) 

      What I really meant was that if there are two choices that meet the rules. Use the one that you are most likely to follow through with.

      For many people (and I include myself here) reducing anxiety about money issues is MUCH more important than losing out on the absolute best long term approach.

      If you living paycheck to paycheck then then implementing the very best algorithm to reduce interest is just another stress until your money over say 30 days old.

      Just saying...

      Reply Like
    • nolesrule I agree, we are in furious agreement 😁👍

      Reply Like 1
      • Saish Dawg
      • saish_dawg
      • 2 mths ago
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      WordTenor Took me a couple days and a lot of Excel work, but it is possible to dial-in withholding pretty accurately once you have the formulae. (Far easier for consistent paychecks than those with irregular income). For those curious: https://www.irs.gov/pub/irs-prior/p15--2019.pdf. Jump to page 45. As interesting as reading stereo instructions, but if you really want to know how it works, enjoy!

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      • WordTenor
      • Your lieutenant, when there's reckoning to be reckoned.
      • WordTenor
      • 2 mths ago
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      Saish Dawg I do not need to know how it works, but thanks. Maybe some noobs need it. 

      Reply Like 2
      • Stacy C
      • nursepower
      • 2 mths ago
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      Slate Blue Koala This brings up a 3rd option. We had NO savings, so since the beginning of the year I've been "paying myself first", placing 10% of each paycheck into savings. I do not have 30 days ahead yet. I could add the return to the savings to help get there faster? I also have an oil change for my Subaru and a 90K check up for my sons' car coming up, so I could always do that. Forget the debt, I'll use the money to keep from going further in debt. 
       

      Reply Like 1
      • bevocat
      • Sometimes, It Just Sucks to Be You
      • bevocat
      • 2 mths ago
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      Stacy C And that is why nolesrule said "not enough information, but in a vacuum..." Because yes, if you need that money to avoid going further into debt, 100% that is the right answer. When you find yourself in a hole, stop digging.

      Reply Like 2
    • Stacy C sounds like a plan. Your 10% savings is a but like an omnibus category or Stuff I Forgot To Budget, perhaps move some of it into specific categories as needed. A great way to build up a list of categories you really need to budget for in future.

      Reply Like
  • Life decided for me. Car repairs for my sons truck were $900 more than expected. I had to use the 900$ in savings and move money around in the budget to pay the bill. I will replace savings with the tax return. 

    On a positive note,  I didnt put it on a credit card although it was extremely tempting.  

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