We have great intentions. We want to go to the gym more, eat better, get more sleep, and do all the things that we know are good for us. This line of thinking applies to our tax refund too.
Did you know:
84% of Americans intend to use their tax refund to pay down debt, increase their savings or invest
But, this is what actually happens.
60% of Americans end up using their refund to make a major purchase, go on vacation or pay for everyday expenses
It’s hard to keep our spending in check when it comes to a tax refund. Even though it’s money you earned, it still feels a little bit like found money – money you can play with, something a little extra just because.
So we want you to strike a balance of putting it to good use while also allowing yourself an indulgence. And we want you to be in the percentage of people who stick to the intentions they had for their refund.
Enter the 90-10 Rule: Use Your Tax Refund Wisely
The 90-10 rule says that 90% of your refund will go toward financial progress like paying down debt, saving or investing. The other 10% is fluff money. Do what you want with it with zero guilt or regret. It’s yours. You earned it. You can enjoy it and feel good that you maintained a healthy balance of saving or paying down debt and spending.
Make a Plan: Don’t Blow Through Your Tax Refund Without Realizing It
First, come up with a plan for your refund. Think about the best way for you to put this money to work for you. How could you really best use this money? Most people’s goals are to pay off debt, build up an emergency fund or put it toward some other savings goal.
Make sure you discuss and confirm your goal with your significant other. If you’re not on the same page about how best to use this refund, start by getting on the same page. If you don’t share finances with someone tell a friend or family member so they can help hold you accountable.
Once you have a plan, write it down. Put this written statement somewhere you can see it. Writing down your goal is key because it helps keep you accountable. Sometimes changing your habits are as simple as declaring your intentions and holding yourself accountable.
Once you get the refund, immediately carry out your plan. Deposit the money in your checking account and then transfer or cut a check to whatever your goal is. If you let it sit in your account for too long, you might get used to that higher amount and increase your spending habits before you realize it. You can eat away at your refund without even realizing it.
Plan for Next Year’s Tax Refund
While getting a massive refund is fun, what it points to is that you’re likely withholding too much in taxes from your paycheck. You’re probably better off getting this extra money every month and putting it in savings or paying off debts throughout the year than if you get it in one lump payment every spring.
We suggest making a plan and changing your withholding on your paycheck. You will be able to save or invest that money every month rather than only one time in April.
Here are some strategies to help you make sure that extra money every month doesn’t get spent:
- Change your direct deposit to add an additional savings account, so that the additional monthly funds get out of your checking account and immediately goes toward one of your financial goals. (If your bank won’t let you open another savings account, check out our post on multiple savings accounts.)
- If your goal is to pay off debt, create an automatic recurring payment to your debt for that amount. You want to take away all temptation to spend this money on anything that is not tied toward paying down your debt.
- Ask your financial advisor to open a savings account that isn’t easily accessible so the temptation to withdraw that money is low.
And if you’re not sure what goals you should put your tax refund towards, we’re here to help. Schedule a Eureka session if you want one-on-one coaching help getting out of debt, sticking to a budget, and creating a plan for your money. Or follow the Fiscal Fitness Facebook page for more money motivation, tips, and tricks.