Comments on: Pay Down That Debt With Your Tax Refund http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/ Not just another (Canadian) financial blog Thu, 18 Mar 2010 12:45:10 +0000 http://wordpress.org/?v=abc By: Karteek http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-112 Karteek Thu, 26 Jan 2006 19:31:47 +0000 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-112 Debt Hater, That's the genius of those 0%-until-paid-off offers. They are counting on the financially illerate to use them, and then continue using the credit card for purchases. Then, when they make payments, little do they realize that ALL their payments go to the no/low APR part, while the high APR balance continues to grow compounded (imagine, if your high APR was 18%, that part of the balance doubles every 4 years!) Debt Hater,

That’s the genius of those 0%-until-paid-off offers. They are counting on the financially illerate to use them, and then continue using the credit card for purchases. Then, when they make payments, little do they realize that ALL their payments go to the no/low APR part, while the high APR balance continues to grow compounded (imagine, if your high APR was 18%, that part of the balance doubles every 4 years!)

]]> By: Dave http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-106 Dave Wed, 25 Jan 2006 05:01:41 +0000 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-106 Debt Hater: I'm guessing you are right, you have to pay the lower interest part first in that case. Debt Hater: I’m guessing you are right, you have to pay the lower interest part first in that case.

]]> By: Debt Hater http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-105 Debt Hater Wed, 25 Jan 2006 04:24:50 +0000 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-105 The debt on one of my credit cards is split, where just about $300 is at 12.5% APR but the rest of the balance is just 6.99%. I'd rather my monthly payment go to the small amount at 12.5% first, but I don't think I can change that. Am I wrong? The debt on one of my credit cards is split, where just about $300 is at 12.5% APR but the rest of the balance is just 6.99%. I’d rather my monthly payment go to the small amount at 12.5% first, but I don’t think I can change that. Am I wrong?

]]> By: Canadian Capitalist » Carnival of Debt Reduction # 19 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-101 Canadian Capitalist » Carnival of Debt Reduction # 19 Mon, 23 Jan 2006 12:35:16 +0000 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-101 [...] Pay Down That Debt With Your Tax Refund: Investing Intelligently shows how to reduce your debt by regularly applying your tax refund to the principal. [...] [...] Pay Down That Debt With Your Tax Refund: Investing Intelligently shows how to reduce your debt by regularly applying your tax refund to the principal. [...]

]]> By: Ray http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-97 Ray Wed, 18 Jan 2006 13:00:59 +0000 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-97 The RRSP thing just confuses things a little bit and makes it harder to figure out. Eventually you are taxed on that money but you get to not only defer the taxes on the income from the investment until you are at least 69, you get to not pay tax on the original investment. The catch is of course that you have to pay tax on everything when you take it out of the RRSP. However, since interest income (i.e. not capital gains or dividends) is taxed at 100% anyway if you can defer the tax on that there really isn't any downside. So if you can find a safe fixed-income investment that pays the same or higher interest than your loan (here's a hint, General Motor bonds are not currently safe investments) then from an overall net worth stand point it would be better to buy the fixed-income investment (and maybe use the tax refund to pay down a part of the debt). The RRSP thing just confuses things a little bit and makes it harder to figure out. Eventually you are taxed on that money but you get to not only defer the taxes on the income from the investment until you are at least 69, you get to not pay tax on the original investment. The catch is of course that you have to pay tax on everything when you take it out of the RRSP. However, since interest income (i.e. not capital gains or dividends) is taxed at 100% anyway if you can defer the tax on that there really isn’t any downside.

So if you can find a safe fixed-income investment that pays the same or higher interest than your loan (here’s a hint, General Motor bonds are not currently safe investments) then from an overall net worth stand point it would be better to buy the fixed-income investment (and maybe use the tax refund to pay down a part of the debt).

]]> By: Dave http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-96 Dave Wed, 18 Jan 2006 05:05:08 +0000 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-96 Ray, does the same thing apply for an investment inside an RRSP? I know capital gains and interest/dividends inside an RRSP aren't taxed, but they are eventually upon withdrawal? Ray, does the same thing apply for an investment inside an RRSP? I know capital gains and interest/dividends inside an RRSP aren’t taxed, but they are eventually upon withdrawal?

]]> By: Dave http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-95 Dave Wed, 18 Jan 2006 05:03:19 +0000 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-95 Ray, Good point! I hadn't thought of this, and I should probably change the wording of the article to read "is sort of like" instead of "is equivalent to." Just small typo in your math... it should be 5%/(1-43%), should it not? Ray,

Good point! I hadn’t thought of this, and I should probably change the wording of the article to read “is sort of like” instead of “is equivalent to.”

Just small typo in your math… it should be 5%/(1-43%), should it not?

]]> By: Ray http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-94 Ray Wed, 18 Jan 2006 02:03:37 +0000 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-94 How did that happen? I was going to say that paying off debt is actually better than buying a fixed-income investment since you would have to pay tax on the income you get from a fixed-income investment. So if you are in the 43% tax bracket and you have a debt that is costing you 5% then you would need to have find a fixed-income investment that paid about 8.75% (5%* (1-43%)) just to break even (after taxes). How did that happen?

I was going to say that paying off debt is actually better than buying a fixed-income investment since you would have to pay tax on the income you get from a fixed-income investment. So if you are in the 43% tax bracket and you have a debt that is costing you 5% then you would need to have find a fixed-income investment that paid about 8.75% (5%* (1-43%)) just to break even (after taxes).

]]> By: Dave http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-93 Dave Tue, 17 Jan 2006 21:22:19 +0000 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-93 Ray, were you going to say something? Ray, were you going to say something?

]]> By: Ray http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-92 Ray Tue, 17 Jan 2006 14:38:50 +0000 http://www.investingintelligently.com/2006/01/16/pay-down-that-debt-with-your-tax-refund/#comment-92 >> Every dollar paid to the principal is equivalent to a dollar contributed into a fixed-income investment which pays interest at the same interest rate as the loan. >> Every dollar paid to the principal is equivalent to a dollar contributed into a fixed-income investment which pays interest at the same interest rate as the loan.

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