The Savvy Way to use Your Tax Refund

By Kevin Gibbons

Is it possible to have fun with your tax refund and still be financially responsible?

One of the Savvy Habits we teach in our book and webinars is The 50/50 Rule. The 50/50 Rule states that whenever you get windfall income, whether from a tax refund, a work bonus, a gift, or finding cash on the sidewalk, you take 50% of it and put it in your long-term savings plan. This is the savings plan for your retirement and long-term future. The other 50%, you are free to use however you want, as long as you do not incur any debt with it. This means you can buy a toy with it if you choose; but you cannot use your refund as a down payment for something that creates a bill.

So, why would we advise spending half of your tax return however you want, rather than focusing on paying off your debt, or even further increasing your savings? First, because we structure spending plans for people based on their regular, predictable income. We don’t want to count on extra money that may or may not be there when you need it. So, you should have a sound financial plan that is not relying on this extra money.

Second, we believe that you need to take care of your long-term future with every piece of your income, both the regular predictable part, and the unplanned, intermittent or extra money that comes your way. Once you have done that, you should have the freedom and personal discretion to use the rest of that extra money as you see fit. You can certainly put it towards paying off debt or increasing savings. But, if you already have an aggressive debt repayment and savings plan, you may want to use this money to treat yourself.

Living the Savvy Life is about finding and maintaining the balance between saving for the future and enjoying your life today. If you have a plan in place to manage spending and savings that does not rely on these windfall incomes like bonuses and tax refunds, then you have the choice when it comes to using those windfalls. You can choose to put them towards your debt reduction and savings, if that is what will give you peace of mind and help you enjoy today. But you also have the choice to spend part of them on something that will make you happy today, knowing that you are being responsible by putting 50% of that money into your long-term savings. Being able to spend on yourself and your family for pleasure, without guilt, is a crucial part of living a Savvy Life and enjoying today while taking care of tomorrow.