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Build savings or pay off debt first? How to make a plan for ‘extra’ money like a tax refund or stimulus check

If you haven't gotten the third stimulus check yet, you're not completely out of luck


Build savings or pay off debt first? How to make a plan for ‘extra’ money like a tax refund or stimulus check

Peter Dunn
 |  Special to USA TODAYBiden stimulus package details of $1.8 trillion American Families PlanBiden stimulus package details revealed: American Families Plan includes free childcare, community college, and possible hike of capital gains tax.Staff Video, USA TODAYDear Pete,I can’t believe it, but we more or less survived the last 12 months without too much financial damage. We did spend through our emergency fund ($15,000) and go into about $5,000 worth of debt, but given I was jobless for nine months, I’m okay with that. I have a job now, and am ready to get back on solid ground. Should I focus on paying off debt or building my emergency fund back up?– Bradley, AtlantaI’m glad you recognize what an achievement it was to get through 2020 relatively unscathed. It’s rather easy to think about what your savings account balance used to be, and to think about how great the zero balance on your credit card was, all the while beating yourself up for your new reality. Unfortunately, too many people are understandably consumed with what’s been lost, and it’s impacting their ability to move forward. Financial paralysis is real, and its impact can be devastating.Save better, spend better:  Money tips and advice delivered right to your inbox. Sign up hereThe whole reason you had an emergency fund and had access to credit in the first place was for this very circumstance. Your plan worked perfectly, as did the plans of millions of other Americans. And as you’ve surmised, the next step in the process is to rebuild your reserves.Before we get to your savings and debt elimination strategy, it’s important for you to understand the biggest key to success moving forward: Your newfound resourcefulness.You were able to survive nine months of joblessness, which likely means you significantly reduced your household spending to the bare essentials. And like millions of other Americans, you may be experiencing pent-up consumer demand. In other words, you’re ready for your life to get back to normal, in terms of consumption, sooner rather than later.More stimulus checks on the way: IRS distributes another 1.1M, including ‘plus-up’ paymentsWhere’s my tax refund?: Americans face delays as IRS holds nearly 30M tax returns for manual processingHowever, if you’d like to get this whole episode behind you as soon as possible, continue to restrict your spending for at least the next six to nine months. This strategy will super-power your income, and more importantly, help create the momentum you need to get back whole again. I’m not sure how long it took for you to build up your emergency fund last time, but this time you have an extra $5,000 of debt to deal with, to boot. As much as I’d love for you to be back where you started within the next year, that will be incredibly difficult to do.As to whether you should build savings or eliminate debt first, that depends on a few very important factors. You should always have a base level of savings, if for no reason other than cash flow purposes. When bill due dates and paydays don’t match up, a nominal savings buffer can ensure that unnecessary financial damage isn’t done. For this reason, accumulate $1,000 to $2,000 in savings prior to moving onto debt elimination.The next factor to consider is your credit card interest rate. If for some reason your rate is excessively high, such as 20% or more, then not only should you prioritize debt elimination, but you should actually consider securing additional income to get it done sooner rather than later. If your interest rate is surprisingly low, such as 0%, then you don’t necessarily need to pay it down with such urgency.The ultimate goal is to assign a monthly amount you’re willing and able to commit to increasing your net worth via savings and debt elimination, and stay at it as long as possible.The final factor to consider is what I call your “next dollar goal.” Sure you’re going to commit a certain amount of money each month to your savings and debt elimination plan, but as you’ve learned throughout your adult life, every once in a while random pieces of money find their way into your life.Whether it’s a stimulus check, a tax refund, an advanced child tax credit, or even incentive pay from work, when “extra” money comes into your life, you must have a plan for it. In other words, you need a plan for your next unexpected dollar. Too often people waste this sort of income because they don’t have a plan for it. It just feels like found money. Decide right now whether your next dollar will go to completing your emergency fund or paying down your debt.Congrats on your success over the last 12 months. I hope you’re enjoying the peace which comes with your diligence. Now build that emergency plan back-up, in case you were to need it again.Unemployment $10,200 tax break: Some may need to amend IRS tax returns for tax refundsPeter Dunn is an author, speaker and radio host, and he has a free podcast: “Million Dollar Plan.” Have a question for Pete the Planner? Email him at The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.

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