“Matt, what would you recommend I do with my tax refund?”
At this time of year, I hear this question a lot. My answer: “It depends. Let me explain.”
What you should do depends on where you are on your path to financial independence.
Whatever the source of “found” money may be – a tax refund, inheritance or simply an unexpected, fortunate event – you can use this guide to manage that money wisely and avoid the temptation to splurge.
Pay the bills
If you have past-due bills, use all of your available resources to pay them off. Resist the urge to spend your found money on a vacation or ski trip and use it catch up.
You also might consider selling items you no longer need on Craig’s List, eBay or Amazon. This is an easy way to raise a little extra cash for bill paying and clear out clutter in your life.
Save for upcoming expenses:
Don’t let a pending expense become an emergency. Saving money for those less-than-monthly expenses is what makes a budget realistic and emergencies less likely.
Financial emergencies are often the result of a planning failure. Take car tires, for example. Frequently, purchasing them becomes a crisis, despite knowing they will wear out and need replacement. Ideally, you should accumulate a little money each month and be prepared for that expense when it comes.
Consider using your found money to establish an accumulation account to avoid this type of financial emergency. Don’t let those less-than-monthly expenses turn into unwanted debts.
Create an emergency fund:
Do you have at least a $1,000 tucked away for that unexpected emergency? If you don’t, begin building an emergency fund. Do this before dedicating your found money to paying off debt.
Begin by saving $1,000. If your household income is less than $25,000, establish a $500 emergency fund. This extra cash will help you avoid taking on debt when the inevitable unexpected event happens.
Tackle that debt:
Make a list – from smallest to largest – of all your non-mortgage-related debts, writing the exact amount owed to each creditor. Pay at least the minimum amount on each and use your found money to eliminate as many debts as possible. For most people, the process of becoming debt-free takes just 12 to 18 months
Grow your emergency fund:
Once you’ve eliminated your non-mortgage debt, it’s time to build your emergency fund from $1,000 to three to six months of living expenses. Yes, this requires a realistic budget to calculate. To make building your fund easier, dedicate the money that you were using to pay off debt to growing your emergency fund. Typically, this step takes about 12 months.
This year, use that tax refund to begin or advance your journey to financial independence. In just two years, you can go from broke and hoping your money lasts until your next paycheck to financially secure and prepared for financial success.
Make that found money work for you.
matt.kelly.durango@gmail. Durango resident and personal finance coach Matt Kelly owns Momemtum: Personal Finance. www.personalfinancecoachingcom.