I’m in for a pretty nice tax return this year. Of course, the first thing I think of: how to spend it. In the past, I’m sure I would’ve rolled it into right into a new laptop or another gadget. But this year I’m taking a different approach for my tax return and other relatively small sums of money I’ve earned or received. I’ve come up with a new plan for all “small cash windfalls.”
For this post, let’s consider a “small cash windfall” any lump cash income as little as a few hundred dollars but less than $3,000, as the average tax refund for 2009 was $3,036. It’s a decent chunk of change, but it’s probably not going to change your life on the spot. There’s a variety of small cash windfalls that fall into the same category: a cash gift, inheritance, income from selling something on eBay, repayment of an old debt that you’ve forgotten about. I typically don’t count on these incomes (hence the “windfall”), so I haven’t had a plan for what to do when I do unexpectedly receive them. But I have reallized some trends that I’ve struggled with:
1) I may spend my gains many times over. I’ll think about purchasing that pair of shoes and justify my purchase by saying “I did just get $600 from my tax return, so it’s totally okay if I spend a little more.” I’ll then do this for my next few purchases on books, dinners, courses, or other extra expenses. Soon enough, I’ve spent more than whatever the amount I received actually was. Total waste.
2) I don’t treat it as normal income. I don’t take out any savings or put anything aside for bills, rent, utilities or other monthly expenses. This is especially silly for tax refunds, because a tax refund really is income I’ve have earned!
3) I don’t consider alternative uses. I’ll often think about what I can spend it on right now, rather than saving for more rewarding use later. My natural inclination is “it’s my lucky day, so I’m going to enjoy it however I please.” I spend enough money as is; I don’t need to find other things to spend it on. If there’s an expense I could use the refund to cover, great. If not, saving seems like a better option.
I’m sure you can relate to at least something from the list (I’ve definitely seen other with these mentalities before!) This year, I’ve already planned ahead for my tax refund. Here’s how I’ll (easily) remedy the above issues:
1) This is simple: I’ll track the spending that’s I’ve directly attributed to my tax return. Every time I buy something “extra,” I’ll keep a special entry in my budget and spending spreadsheet. Once’s I’ve allocated all of my tax return, that’s it; I can’t spend any more against that account. This time around, I’ll actually know when I’ve reached that point by quantitatively tracking the refund instead of trying to figure it out based on memory.
2) I’m going to immediately replenish some of my savings and pay credit card bills. I’ve been working on establishing a small emergency fund, so I’m going to put 10% of my tax return into my ING Direct account. I’ve been on a bit of a “fun” streak the past few weeks, which has involved a little more spending due to weekend getaways. Then, for the grand finale, I’m going on vacation to Spain in March. I’m immediately going to apply my tax return to cover as much of my travel expenses as possible. This will coincide with #1, as I will itemize each of these expenses.
3) This year, I won’t be buying any things with my tax refund. There’s just not anything I really need right now. Instead, I’m going to spend my refund on a vacation (which is definitely needed). While I was originally going to pay for the recent getaways and the trip to Spain using my savings, it makes much more sense to apply my tax return towards it. If I have any refund left after that, I’ll bank it for when I may need it in the future.
The advice here is intuitive and basic. In fact, I’m a little disappointed I didn’t consider this sooner. I think it’s most important to realize that these refunds and bonuses we’re coming across maybe small in the grand scheme, but they can have a big impact on your personal finances when spent wisely.
Do you have a plan for this type of income? Please share in the comments below.
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photo by: Refracted Moments™