Over the holidays people often receive small cash windfalls as gifts or holiday bonuses. Extra money is always great, but it is sometimes hard to decide what to do with this money especially if you have debt to pay off. When you get extra money it is fun to go out and buy something you really want, but it is practical to put that money towards debt. So what should you really do?
I usually use the 25%-75% rule. This means using 25% of the money to buy something fun and 75% of the money toward paying off debt. By doing this you won’t feel deprived, but you won’t feel guilty either. It is best to put the 75% towards your debt with the highest interest rate. If you have credit card debt that is probably the one you will want to tackle first. You should use this rule with every cash windfall until your debt is paid off. If you do not have any debt you can use the same rule and put the money into savings or investments instead.
Here is an example: For Christmas this year I received about $500 in gifts from family members. Although I do not have any credit card debt I do have student loan debt and a car that I am paying off. Since my car loan has the highest interest rate I took $375 and put it towards paying that off. I then took the the remaining $125 and went on a little shopping spree.
Of course, if you are in serious debt and not able to make even minimum monthly payments it is wise and necessary to put the entire sum towards digging yourself out. Otherwise, have a little bit of fun, but keep your eye on the end result and think about how good it will feel when you are debt free!
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