Assuming you followed my advice from the March issue of SUCCESS and filed your 2013 tax return early—before the specter of April 15 began to loom large—there might be a nice surprise slipped into your mailbox in the near future: a tax refund check.
Before I get into the prudent or fun things that can be done with this sudden influx of cash, I should make one point to those folks who receive a regular paycheck from an employer and to small-business owners who pay themselves a salary through their companies.
The goal is not to receive money back from Uncle Sam each year: If you receive a refund, change your W-4 withholding to get that money into your weekly or biweekly paycheck so you can more effectively budget your income throughout the year. If you owe a penalty, make sure you’re not having too little money withheld. Due to rises in the cost of living, a dollar is worth more to you today than it will be later, so it’s important to collect it when you can rather than letting it rest with the government for months and months.
As to the question of what to do with that newfound pile of cash, the answer goes like this: Don’t think of your financial windfalls as splurge money. You should plan on doing something constructive with them, preferably paying off debt you owe, or if you’re debt-free, placing the money in your emergency savings account (you need at least six months of expenses stored away for a rainy day).
Persuading yourself to save rather than spend what can seem like a surprise bonus may be difficult. But if you know that government check is headed for your savings or investment account before you even open the envelope, it’s a lot easier to part ways with the unexpected cash. Too often, receiving a windfall serves as a kind of subconscious consent to increase spending. If you’re set up for direct deposit at your place of work, you already know it’s much easier to save money before it lands in your checking account than it is to keep it there and tell yourself not to spend it.
There’s another way to handle unexpected money: Decide you’re going to save 75 percent of it. Every time. As for the leftover 25 percent, do whatever you want. A steadfast financial plan that allows some freedom for luxuries is a sustainable financial plan. So allowing yourself the freedom to spend a quarter of this unexpected money is, in actuality, a major factor in your ability to save the other 75 percent.