For many of us, tax season means money in the bank. Well, at least for a little while…until we spend it, right? If you are anticipating a refund this year, do you have a plan for what you will do with this extra cash? Lately, I’ve been asking my clients what they plan to do with their refunds. Although “creating savings” seems to be a common response, very few people could actually tell me what expenses they were specifically saving for. Also, some of my clients who were planning to set aside their refunds to savings had already filed their returns and requested that the refund be automatically deposited to their checking account.
Automatically deposit your tax refund to a savings account!
Avoid depositing your tax refund into your checking account, even if you have every intention of transferring this money over to savings later. It’s too easy to justify overspending when the funds are a debit card swipe away.
Don’t let that refund slip through the holes in your pockets!
Make sure to deposit this extra money to an account that is more difficult to gain access to so you will be less likely to spend it on impulsive purchases.
If you are planning to set aside your tax refund (or at least part of it) to a savings account, then it’s worth taking some time to figure out what your savings goals are. You are much more likely to follow through with your savings plan if you are clear on what the pay-off will be.
Most people have more than just one savings goal, and this can make planning your savings seem a little more complicated than it has to be. If all of your savings is set aside to one savings account, then what’s going to stop you from spending more than you were supposed to on a vacation so you can’t afford to renew the tabs on your vehicle or pay quarterly insurance premiums? There are two types of periodic expenses to consider as you create a plan for meeting your savings goals.
Priority Periodic Expenses
There are certain periodic expenses that are non-negotiable. You need to make sure you have a cushion of savings in place first and foremost to protect your assets. Your assets are your health, your home, and your car. Obviously, it is way more exciting to save up for a vacation, but if you choose to neglect caring for your assets, there could be severe consequences. If you get a toothache, can you wait to go to the dentist until you have the money? Maybe, but that sounds pretty miserable to me. If your furnace breaks in the middle of winter, could you wait a few months to get it fixed? No way! What about car repairs? If your brakes need to be replaced, will you continue to drive and risk your life for lack of savings? I really hope not, although I do know a few people who have done this and it just isn’t worth it!
If you currently do not have a cushion of savings specifically set aside to cover your priority periodic expenses, then this should be your first savings goal, because I can assure you that at some point your car WILL break down, you WILL get sick, and your furnace WILL need to be replaced. Things and people break down over time. Unless you are Superman or Wonder Woman, this is inevitable.
Flexible Periodic Expenses
Once you have a cushion saved for your priority periodic expenses, you can make a list of all of the other expenses you should be saving for such as clothing, gifts/holidays, travel/vacations, and any other savings goals you might have. These savings goals are a little bit more flexible than your priority periodic expenses. If you need a new coat and do not have the money saved, you can always wait a few pay checks and wear your old coat until you can afford a new one. Flexible periodic expenses are usually a little bit more fun to save up for. Your goals could include a vacation, a new iPad, or new tile for your bathroom floor.
I admit that when I was younger I would build up my savings and have absolutely no plan for what I was going to end up spending it on. I learned my lesson the hard way on a rainy Sunday afternoon after I impulsively spent the majority of my savings on a new wardrobe. I remember feeling a slight stomach cramp as I stood in the check-out line. Perhaps, you can relate to my physical symptom of buyer’s remorse. I justified my purchases by telling myself that I could easily build my savings back up again. I mean seriously, I was setting aside $100 to my savings account every single month. In a few months I would have a nice cushion saved up again anyway, and plus, have you ever seen a cuter pair of boots? They will go with every outfit!
The unthinkable happened.
My vehicle ended up with two irreparable flat tires. (Either I had a major enemy I wasn’t aware of, or when I drove my car through a construction zone I managed to do it with such precision, that I ran over two nails, perfectly spaced, to puncture both front tires). Ughh! Either way, I needed new tires and had no money to purchase them because I had spent all of my savings on new clothes.
So, how do I avoid this type of predicament in the future? I look back over the year, and do my best to estimate how much I spent on car and home repair/maintenance, and I estimate my out of pocket for doctor co pays, dentist visits, and eye exams. These are my priority non-monthly expenses. I need to set aside enough savings to cover these expenses or I am at risk for experiencing negative consequences such as being forced to borrow from high interest rip off credit in order to pay for the expense.
I estimate these combined expenses at $1800 per year. And I always save this up first before focusing on my other savings goals.
Do you have enough money in savings to cover your priority periodic expenses this year? If not, consider using your tax refund to get this base covered so you can focus on your other savings goals with confidence. Trust me; you will be glad you did when that dental bill comes in the mail or your vehicle tabs need to be renewed. Planning ahead can help you avoid financial crises and stress!
Need help planning how you will save up for your periodic expenses or how to spend your tax refund? Take action and give us a call at 888.577.2227 to schedule free budget counseling with one of our Certified Financial Counselors or GET STARTED ONLINE NOW.
Author Mary Mckeague with LSS is a Certified Financial Counselor and specializes in budget and debt counseling.