The folks here at Billshark know what’s it’s like to be on a diet. You starve yourself for days, weeks, months, and along comes a birthday, or a holiday, or a wedding, and you tell yourself: “I’ve been good all this time. Today I’m going to live it up.”
It’s the same with living on a budget. You watch every penny, scrimp and save and deny yourself so many things you really want, and along comes that tax refund (or bonus, or other windfall) and you say, “This is ‘found money’ and I’m going to get that great pair of shoes or new iPhone or trip to Aruba. I deserve it.”
The problem is, once you’ve spent that money it’s like falling off your diet. You may have had a momentary taste of pleasure, but now the money’s gone, and the memory of that one-time indulgence becomes clouded over with the tinge of regret.
Yes, it’s hard to exercise self-control all the time, but in the long run, you know you’ll be better off. When you can finally put on that bathing suit and feel good looking in the mirror, or retire comfortably when your friends are still struggling, you’ll not only have the satisfaction of having achieved your goal, but feel good about what you’ve accomplished.
So let Billshark suggest seven smarter things to do with your tax refund than treating yourself to that sunny vacation.
1. Add to your emergency fund
This is absolutely the smartest thing you can do with an unexpected windfall. The rule of thumb is to keep six months’ salary readily available for emergencies. You might lose your job, get a divorce, have an accident, your pet might suddenly require expensive surgery, a tree might fall on your house… The fact is, unexpected things happen all the time, to everyone, and if you’re not prepared with a nice financial cushion, you’ll have to borrow from credit cards, friends, or family to meet these emergencies.
2. Increase your 401k contributions
If you’re not maxing out the allowable amount of your workplace savings plan’s contributions, put your extra cash here. If your employer doesn’t offer such a plan, you’d be smart to open a traditional IRA or Roth IRA on your own. Both the 401k and traditional IRA provide tax savings now; a Roth IRA taxes your contributions now, but allows you to withdraw both your original contributions and any accrued earnings when you retire tax free.
3. Pay down debt
Another smart move, and an excellent place to invest your refund. We say “invest” because no matter what interest rate you’re paying on any outstanding loans or credit card debt, it’s handing over good, hard cash to other people that you could be keeping for yourself. This “investment” will pay you five to 20 percent or more in savings, depending on the interest rates you’re paying.
4. Invest in yourself
Could you take classes or even acquire an additional degree that would help either boost your current earnings or allow you to change to a better job? What about taking courses—in technology, for example—that could help make you more secure in your current job?
How about using that windfall as seed money to start the business you’ve been thinking of?
Or invest in your health. Join a gym, take Pilates classes, buy a bike or get a medical check up. The payoff in improved physical and mental health will be worth it.
5. Invest in your car
Even if there’s nothing wrong with your car at the moment, take it to a great mechanic for a bumper-to-bumper going over, and make any recommended repairs or replacements before something goes wrong.
6. Change your withholding amounts
That sweet check you get in the spring means the government has been holding (and using) your money all year, interest free. Use some of your refund to talk to an account about adjusting the withholding amount on your wages or revising your estimated tax payments. Sure, the treasury needs all the help it can get, but not from you.
7. Blow 10 percent on fun
Everyone needs rewards now and then. If you allow yourself to spend 10 percent of your windfall on a splurge, you feel less deprived and more virtuous at the same time.
And speaking of windfalls, Billshark can save you hundreds or even thousands of dollars on your current bills that you can put toward any of these areas.