Tax Refund Tips: Have a little fun AND plan for your future

It’s tax time, and if you’re one of the lucky ones you’ll be receiving a refund. For many, it’s like winning the lottery and the winnings are being spent in their heads before the money’s in the bank. Some intentions are good, such as paying off a bill, but often, the money is spent without much thought and you end up feeling even more financially insecure than before you received it.

It doesn’t have to be this way. If you plan wisely, you can help to build your future AND still have a little fun with your earnings.

Here are some great tips from Get Rich Slowly.

1. Don’t spend a single penny before the money arrives in your bank account.
Don’t charge something on credit cards; don’t promise to spend the money; don’t put a deposit down with the rest due the day you expect the refund. Naturally, this one is very difficult in practice. This year, I had a fantastic deal on wool comforters made by a nice family on the outskirts of the city; lots off retail, with a third down in December and the rest due at the end of January. Surely my tax refund would arrive by then! And I really did need new comforters — the feathers coming out of my old one were so thick it looks like some geese are about to lay eggs under the bed. Everything worked out, but I had to juggle, and I felt a little awful using the comforter a few days before I expected the refund to arrive. I’d paid for it, but I’d have to make it up later.

You won’t know what unexpected expense or nasty delay might cause you to be staring down a final payment or contract fulfillment without anything left in your bank account but hope. And then, you could end up using costly credit or financial shenanigans to make good on your promise.

2. Pick a debt that can reasonably be paid off with the tax refund. And do it!
Also, try negotiating the balance due. I’m still, faithfully but slowly, paying off long-ago-closed credit card accounts. Number two was 76% paid as of January 30. I called the day the money hit my account to negotiate a big payment that will satisfy the whole account — and I’m saving $1,000 off the original balance. (I could probably have worked it down further; my negotiation skills are great, until I wear out and let them “win.” You could try harder!) Now I’m planning to spend March working out a payment plan for credit card number three — the last.

3. Put at least a third in a savings account, right away.
Consider it “someone else’s money.” (Your future needy self, of course!) If I leave the money in my regular checking account, I’ll consider it fair game. And it’s the perfect seed for the emergency fund you’ve been wanting to start. It’s important that I separate the concepts of “savings” from “checking account buffer”; I’m far less likely to preserve the buffer, so I have to get it into a separate account. Preferably one that’s harder to withdraw from. So I’m planning to get half of that savings into a Roth IRA. It’s not a ton of money, but it’s better than letting it sit where I can access it for emergencies that… aren’t really.

4. Commit to yourself to buy things that will pay you back in savings.
Note I am not including “wardrobe investments” in this (unless perhaps we’re talking about a wardrobe completely devoid of work boots, or something). I consider things such as upgraded windows (to save you energy costs), a couple of bus passes or other bulk purchase of something you use very frequently (to save you stress, having to make change, and get a bulk discount). Maybe a bike could replace a short commute, or a second car. (My stimulus check in 2008 went to a fancy mama bike that’s saved me so many thousands of dollars I’ve stopped tracking.) Maybe you can buy a half of a cow from a local farmer, saving you tons all year on quality meat — or maybe a chest freezer to make that possible. This concept is served by my wool comforters; they’re so freakishly warm that I’ll be able to turn the furnace down several degrees at night.

5. Spend 5% or so on something nice.
I know, the “windfall” rules say to only spend 1% on splurges. But let’s go crazy! It’s just a tax refund, after all. Go out to eat with your family (once). Buy yourself a pretty raincoat or some new wool underwear (my favorite splurge). Just make sure you feel good about yourself and you stick to the 5%.

You can find more tips at getrichslowly.org.