Financial Planning Friday: Follow This Rule When Spending a Tax Refund.

April 15th, 2016 by Anchor Bay Capital's Investment Team

In this tax-day version of Financial Planning Friday, I thought it would be helpful to discuss some ideas for a refund.  Over the years, I have noticed that people sometimes form habits around a refund and how they spend it.  If you are looking for a way to break out of the norm or considering several options, this may help:

50-20-30 Rule

With clients, I often teach this rule when creating a budget.  The idea is that 50% of your net income should be spent on basic living expenses, 20% on your future, and 30% on your lifestyle.  What if you applied this rule to your refund?  You may have several financial priorities on your mind right now, and dividing up how you use the money could make it go farther in accomplishing your goals.  Let’s take a look at common ways a refund may be spent and where they fall according to this rule.

The 50%

This large part of the budget is allocated to paying for your basic living expenses.  Taking your cash infusion and getting ahead in everyday life can lift some weight off your shoulders. Here are some ideas for this category:

• Build your emergency fund. Having 6 months of net income can take care of your basic needs in an emergency.  If don’t have that set aside, this could be a good step in that direction.
• Pay off high-interest debt. Take this opportunity to eliminate credit cards or high-interest student loans.
• Invest in energy efficient changes to your home. Are there upgrades that you can make that would lower your monthly expenses?  Many utility company websites have tools that will allow you to estimate your monthly savings by making certain upgrades

The 20%

Pay yourself!  Since your refund was essentially forced savings over the last year, you can use this boost to save more for your future.

• Open or contribute to your retirement account. A Roth IRA is a great way to supplement your IRA/401k savings.
• Invest in your business. This may be the time to ramp up your marketing or make changes to help your business run more efficiently and put more money in your pocket.
• Invest in yourself. Professionally or personally, is there a class or training that will enhance your income and create better future opportunities.

The 30%

Have some fun!  Spending on your lifestyle helps you live in the present.  So after you have taken care of your future, I am sure you have many ideas of how to spend the rest.

• Home remodeling
• Travel
• Shopping
• Giving Back – Whether it is a charity, school, family member, or someone else in need, helping others with your money is a great way to get fulfillment.

There are plenty of other ways you can use your money, but hopefully this gives you an idea you can apply in deciding what to do.  Enjoy and don’t spend it all in one place!