Have you ever received a big tax refund or bonus and it was gone before you knew it? Did you later regret all those small purchases that wiped out the entire windfall and had nothing to do with your long-term goals, such as pay off debt, create an emergency fund, or start that business that you’ve always dreamed of? If you don’t have a written plan with your values, goals, and priorities, it’s harder to allocate money to what we don’t do naturally on a day-to-day basis. Here are three actionable steps to creating a plan ahead of time, so you don’t have to stop and think about what to do with your tax refunds. You’ll know exactly what to spend it on and how much you should spend.
#1 – Create and Prioritize a Values & Goals List.
This plan is just a simple list of your top 3 – 5 values with specific financial goals that would help you achieve those values. For example, if debt and the worry of how to cover emergencies are keeping you up at night and causing stress and fights within your relationships, then Financial Security should be listed as a value. Then goals can include 1. Pay off all debt (e.g. $6,000) and 2. Create a 3 months’ emergency fund (e.g. $30,000). If you own a small business, ideally you have two separate lists since you should be managing the money in separate bank accounts. (*In my book, I share many real-life examples in Chapter 1 where commingling personal and business funds leads to bad things, including tax and IRS nightmares.)
Example for Personal Values and Goals:
Value: Achieve financial security to reduce/eliminate stress and fighting.
- Goal 1: Pay off all debt (e.g. $6,000).
- Goal 2: Create a 3 – 6 months’ emergency fund (e.g. $30,000).
Value: Become an expert and influencer in my field.
- Goal 1: Attend financial blogging conference each year. (e.g. $2,000)
- Goal 2: Get certifications and additional training to add to resume and LinkedIn profile. (e.g. $1,200).
Value: Explore the country with family for bonding and learning experience.
- Goal: Take two vacations each year to cities that the family has never been. (e.g. $2,000)
Example for Small Business Values and Goals:
Value: Achieve financial security to not burden family and have to return to 9 – 5.
- Goal 1: Pay off business debt (e.g. $4,000).
- Goals 2: Create a 3 months’ cash cushion (e.g. $6,000)
Value: Maintain work-life balance to spend time with family.
- Goal: Outsource Admin Work to Virtual Assistant (e.g. $500 per month).
Value: Achieve financial independence through passive income streams.
- Goal 1: Write and self-publish a book (e.g. $10,000).
- Goal 2: Take a training course by online marketing experts (e.g. $5,000).
#2 – Create a Bonus & Tax Refund Plan.
Now that you have your Goals & Priorities list, you want to go through and write down an actual dollar amount and/or percentage for how much you want to put towards your goals each time you get a bonus, tax refund, or unexpected windfall. This takes the guesswork out of what to do when a huge amount of money is just sitting in your bank account. Otherwise, when we see a huge balance and don’t have a clear, specific intention with the money, it can lead to spending of money on things because you can “afford” it, but not for the thinks that you really want in life. It can also make you feel guilty spending it on something you’ve always dreamed of doing, like a big family vacation or leaving the 9-5 and starting your own company if you didn’t specifically allocate that money ahead of time.
Example of Personal Bonus & Tax Refund Spending Plan:
- Pay off debt – 50%
- Create emergency fund – 25%
- Invest in self-education – 10%
- Start a business – 15%
- Fun money for personal splurge* – $200
(*Note – I’m a big believer in treating yourself if you worked especially hard to earn a big bonus at work. Plan to give yourself, significant other, etc. some fun money to splurge and spend without judgement. This is important even if you have a lot of debt, because if you’re putting every single extra, bonus dollar towards debt repayment without a little treat now and then for yourself, you can start to feel deprived and resentful that you don’t get to “enjoy” your rewards and go back to overspending. Therefore, having a specific dollar amount for fun money is highly recommended!)
Example of Business Bonus & Tax Refund Spending Plan:
- Pay off business debt – 70%
- Create emergency fund – 20%
- Invest in business opportunities, training, conferences – 10%
#3 – Set-up Separate Bank Accounts and Automate.
I strongly encourage you to have separate bank accounts for your main goals so you can visually see the money that has already been saved and allocated, as well as how much you have left to achieve your values. While it may seem unnecessary or a waste of time, try it for a few months and see if it makes a difference.
Create an automatic savings rule with a specific percentage or dollar amount that you want per paycheck or month to be transferred into these accounts. Often the savings rules can be set-up directly with your company’s payroll, or you can set up rules to transfer money out of your main checking account on the day that paychecks clear.
If you shop around at community banks and online banks for checking and savings accounts, often you don’t have to pay a fee to maintain a minimum balance or make a certain number of debit transactions to waive monthly fees. I don’t like accounts that require you to make ten to fifteen debit transactions to waive a $15 monthly fee, because I’ve found myself in the past frantically calling or texting my husband to hurry up and use his debit card three more times before midnight while he’s at the airport on his way to fly home. He was never happy to get these texts asking him to purchase things that he didn’t need or want to buy, and to ask the cashier to run them as three separate transactions while he was at it! After about three or four months of doing this and realizing we were forcing ourselves to spend money on things we didn’t need to “save” on the $15 maintenance fee, I switched bank accounts that didn’t have these spending requirements, even though they didn’t earn as much interest.
My favorite banks for free checking accounts include Capital Bank if you’re in the southeast region, Capital One for personal and business checking that pays 1.00% APY for the first 12 months, and Emigrant Direct. First Citizens is another bank with more than 500 branches that usually has one free checking account for business.
Make sure you take 30 minutes to do this exercise BEFORE you get your anticipated tax refunds or bonuses. It’s easy to get excited when there is a lot of money sitting in your checking account and forget all the things that keep you up at night, either from stress or excitement for the future. Taking 15 minutes to write down your values will ensure you spend and save towards goals that help you achieve both the personal and business life that you’ve always wanted.
(*Note – If you owed money this tax season and didn’t have all the cash for it, make sure you create a tax savings account, especially if you’re a small business owner. Don’t get caught spending all your “profits” when it wasn’t yours to spend in the first place!)
Do you have big plans for your tax refund? If so, I’d love to hear how you plan to spend or save that money.
Or have you ever received a big bonus and windfall, only to not have anything to really show for it? If so, share your thoughts and what you would do differently in the future.