Tax Refund

Put Your Tax Refund Where It Needs to Go

How to be prepared for your tax refund or other financial windfalls

If you think you might have a chunk of money (like a tax refund, for example) coming your way soon, this message is for you. If you don’t think you have an unexpected sum of money coming your way, this message is still for you. Over 127 million Americans received the second stimulus check this month. No matter what form it comes in, you’re going to need to know what to do with a windfall, no matter what your financial battle plan is.

Did you like the way I said that? Financial battle plan sounds much better than budget, doesn’t it? That’s what we’re really talking about here, but as soon as you mention the dreaded “B” word, people start dozing off.

Now, I’ll be the first to admit I’m not a stickler for the “count every penny” type of budget. I don’t get one of those fancy journals with the yellowish pages and lovingly spend hours crafting a hand-written chart of my income and outgo for the year. Nothing wrong with that if it’s your bag, it just doesn’t happen to be mine.

Figure Out Where You’re At

/Tax Refund

No matter what though, we all need a clear picture of what our actual financial situation is. Even if we smooth off the edges because we don’t want it to be a second job, we have to spend some time going over the nuts and bolts of our financial situation. Part of that process is having some medium and long-term plans for our money. Ultimately, we all need a plan for our money that stretches as far as the eye can see.

A big reason for that is to be prepared when you receive a financial windfall. Under normal circumstances – I don’t really know what normal is anymore, but let’s assume there is such a thing – under normal circumstances, if you get paid every other week and get a tax refund back, you have three financial windfalls each year that you need to be ready for. On top of those, there are many others such as stimulus checks.

If you have a biweekly pay period, you probably budget around two paychecks per month. I said that word again…. That means there are two extra paychecks each year that are unaccounted for. Throw in your tax refund, if you get one, and there’s three times per year you get a lump of money coming in that’s outside your normal income schedule.

Have a plan for that money!

If you don’t, you’ll probably fritter it away on your favorite vice or spend it on Amazon. Believe me, Jeff Bezos doesn’t need it though. You need it. Your future self needs it. So, how do you set up a plan to hold on to the money that comes in outside of your normal budget? Good question, I’m glad you asked.

Get Your Priorities Straight

The first step is to establish your priorities. Maybe you’re trying to pay off debt or set aside money for an emergency. Hopefully both. Whatever your financial needs are, have a strategy for how you’re going to work towards your goals.

Because life can throw curveballs at you, it’s a good idea to have an underlying reason for the order you put them in. Then, when the curveballs start coming across the plate and you have to change things up, you can while keeping with your overall strategy.

For example, let’s say you are just getting started on your financial journey and everything is a priority. We’ve all been there. There are so many things to do that it’s paralyzing. Your priorities might be something like this:

  • Short-term emergency savings
  • Pay off some smaller credit cards
  • Targeted savings for holidays, vacations, or something else
  • Pay off bigger credit cards
  • Pay off bigger loans such as car or house

Or, maybe you’ve been at it awhile, you’ve taken care of the smaller things, and your priorities look more like:

  • Finish setting aside 6 months of expenses
  • Pay off the car
  • Pay off the house

Either way, you know what the next thing on your list is and why it’s set up the way it is. When that financial windfall drops in your lap, you’ll know what to do with it. Developing the resolve to stick to your plan is a topic for another time, but I can tell you it feels cleansing to be moving towards your destination.

Be Flexible

And, if your situation changes or if the world does, you can be flexible with your list without going in circles because there was a method to your madness. In the first example, you were just getting started and your strategy was to get the ball rolling while taking care of the most pressing needs first.

Your list made sense to you at the time but paying off those smaller credit cards got you fired up. Suddenly, you realize it’d be ok to postpone your vacation or skimp a little on Christmas this year. Instead, you scratch the targeted savings you had planned and start in on the other credit cards.

In the second example, you’ve been at this awhile. You’ve already laid several of the bricks in your financial foundation and you’re working on the last few items before really starting to build your wealth. A change in your finances might cause you to want to pay off your car faster. Or a change in real estate might make you want to prioritize paying off your home.

Conclusion

Whatever the case may be, the important thing is to decide what your priorities are and have a plan in line with those priorities. Make a list and put it someplace where you’ll see it every day. Write it in lipstick on the bathroom mirror or print it out and stick it to the fridge. Then, it will be front and center in your mind at all times and when that financial windfall comes your way, it will go towards your bottom line instead of Jeff Bezos’s. Your future self will thank me.

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