One good way to get the best of both worlds is to look to a familiar budgeting tool, the 50/15/5 rule, which will help you allot different percentages of your refund for bills, retirement, and savings, and then leaves you with an amount to use however you like. Keep in mind the percentages are meant to be a guide and you can adjust based on your particular circumstances. So here’s your tax refund plan of attack:
Handle Your Essentials – 50% of your refund or as close as you can get
Bills and expenses are the buzzkill of adulting, but they have to be taken care of. Sure, this part is pretty damn lame but sometimes you gotta make the tough decisions and they should be your priority with your refund and where most of it should go. Focus on anything that would upend your life or have people calling if they weren’t paid on time: rent, food, gas, student loans, and other debt. Within your bills, you should also prioritize as much as possible, too, by making sure you cover all the inflexible payments that don’t change from month to month. Then you can deal with balances where you’ve only been paying minimums. Even if you’ve got some breathing room because you’re on top of your finances and tend to manage really well, there’s no harm in getting ahead of them, so don’t even think about what else you could possibly do with the cash, stick to the plan, man.
Put Away For Retirement – 15% of your refund
It’s easy to put retirement considerations on the backburner when staying up past 10 pm isn’t a struggle, but saving for it is just as important as any other current financial plans. If you haven’t set one up, now’s the time, and our Guide To Retirement Plans is a simple primer. Bottom line, retirement plans are easy to set up and super important. Now’s a great time to knock out a chunk of savings, especially if you’ve set up an employer-matching plan, more free money!
Short-Term Savings Fund – 5% of your refund
Whether you’re looking for a backstop against those out-of-nowhere expenses like car problems or you're looking to save up for a vacation or large purchase, your tax refund is a great opportunity to add some stock to that reservoir. An emergency fund let’s you prepare for the unexpected, and using even as little as 5-10% of your refund can give you a buffer before you have to dip into the savings you wanted to use for something else. Don’t stop at only making a contribution from your refund; get in the habit of applying the 5% rule to all your paychecks going forward. It’s as easy as setting up an automatic monthly withdrawal that happens every time you get a paycheck.
Invest In Yourself – 30% of your refund
Now that the tough part is over, let’s have some fun. Since you've done the responsible thing, you can use what’s left toward something you actually want (finally!). Your closet is a great place to start, especially if you’ve done or plan to do some spring-cleaning. Maybe you’ve got a few weddings this Summer and it’s time for a new suit and a fresh pair of shoes. Or, maybe there’s a dope watch that you’ve had your eye on. Now’s the time. Stretch those dollars by buying timeless pieces you can wear with just about anything and, with good care, can last awhile. Maybe you’ve been wanting an item that has function with regards to something you really care about, like a smartwatch or new running shoes, both of which can help you get serious about your fitness goals. A purchase like this is definitely a worthwhile investment that can pay long-term dividends. Alternatively, investing in a vacation for fun and relaxation can be equally as important. Sprucing up your place is also another way you can put your leftover cash to good use. There’s never been a better time to pick up a new piece of furniture or decorate your walls, especially if you’ve been slumming it on that dumpster fire of a couch from college and the only thing on your wall is a poster of John Belushi from Animal House. Affordable, smart appliances are also flooding the market right now, and we all could use a little more smarts. At the end of the day, you work hard, make smart decisions (most of the time) so we definitely recommend rewarding yourself every now and again.