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Tax Refund Allocation Dilemma Comments

  • By MP Dunleavey
  • March 25, 2010

woman drinking water after run

Meet TRAD

What is TRAD? TRAD is the Tax Refund Allocation Dilemma, and it's a hazard this time of year. Here's one reader's puzzle:

Q: I'm getting about $1,200 back for my tax refund. There are three things that I would like to do. What is the best use of that money?

  1. If I use the money to pay off a personal loan, I'd be debt free, except for my car and student loans.

  2. But maybe I should save the money, because I don't have a "rainy day" fund.

  3. Or, I was in a hit-and-run a few months ago, and I'd like to get my truck fixed, but my deductible is $1,000.

A: You have to weigh your priorities and put self-protection at the top of the list. Here's the patented DW solution: Take smart steps toward each goal.

  1. Put $200 toward your personal loan. That's a nice chunk toward being debt free—and it's all you can afford right now, given your lack of savings protection.

  2. Next, deposit $500 into a rainy day fund, and $500 into a truck fund.

Here's Why

First, does it make sense to repair your truck, given the high deductible? Would it be wiser to start saving for your next vehicle, as this one wears down? Either way, you need a fund for repairs, maintenance and replacement.

And you must have a rainy day fund, because, at some point, it rains. As you save more, either by joining SaveUP! or by embracing the Save-to-Spend budget, transfer funds into a dedicated curveball account, to cover minor expenses that come out of left field.

How are you resolving your own TRAD? Tell us here.

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