I grew up knowing that during the month of February, I would be getting a special gift, and our summer vacation was going to be booked. Being head of household with two young children, my mother’s tax refund was always a decent-sized check. By the time I was old enough to say, “Hey Mom can you maybe not send me on vacation, and instead save that for my college,” she was disabled, and no longer qualified for large tax refunds.
However, I later learned that she did more with each refund than I saw at the time. Living paycheck-to-paycheck is hard, so when you receive a large amount of money at once, you start to do all the little things you couldn’t. You buy the steak, the bag, the shoes — you might even get something for a friend so they know you’re doing well.
For three years, now I have received my own tax refund. On the same day I complete my taxes, I make a list of where all my money is going to go. I will pay extra towards the rent, three months on the car, some to my consumer debt. But when I finally receive that direct deposit, it’s an entirely different story. Cha-ching!! MONEY IN MY POCKET. I automatically get defensive and start justifying what I’d rather do with the money. You know the typical story — what if I die in a year? I might as well buy and do what I want to.
So each year before now, that is exactly what I did:
- Year one: Vacation for family of three to the Dominican Republic, resort and airfare booked. A separate trip to Las Vegas.
- Year two: Louis Vuitton Speedy bag, trip to the Dominican Republic.
- Year three: Two-week trip to Madrid and France.
Now, don’t get me wrong, these are all life experiences that I may not have had (yet) if I didn’t get the nice check. But while these trips and bags were being paid for, there were separate debts in the background: a car note I had no idea would be the worst financial mistake I made; credit cards; other cards in default sitting in collections; student loan interest. Each year, each problem moved onto the next — a simple rollover, and not of the good kind. I felt financially free, but only because I did a bit of “self-care” splurging.
So what’s different now? I guess that, like fixing any problem, I had to admit I made a mistake. In my culture, a tax refund was seen as extra money with no real destination. I grew up knowing it was always going to come, so why not enjoy it? I now know that’s not true. It’s not always going to come, and many people do not get anything back — instead, they might owe money (which is something that actually did happen to me with the new healthcare laws.)
I started having a new love and respect for my money. I also no longer had the “I might die in a year” mentality, and instead accepted I might live until 100, so I need to be prepared. There are many things I believe are more important to do when receiving money that is unexpected or not part of your regular budget. These are just a few:
1. Start an emergency fund
If you know your car won’t get to the extra mileage you might be depending on, have money saved to be able to repair it without completely throwing out your budget. Having an emergency fund is also one of the most financially secure things we can do. Start setting aside a simple thousand, then slowly build it up to at least three months of expenses. You’ll realize that once you start, it’s easy to keep going.
2. Pay off debts
I hate credit cards — I can’t say it enough. I am a firm believer that an 18-year-old should never be given a credit card. Especially without the education needed to use them properly. So if you unexpectedly end up with some extra money, PAY THEM OFF. And cut them up if need be. You do not want to be doing the same thing year after year.
3. Pay off the car
If you are able to pay off your car with whatever refund you receive, great. If not, even putting in an extra grand toward the debt will help out. Even if you are saving yourself just a few months of payment, those are months you will be able to start saving your money instead of giving it to the bank. Also, you cannot sell your car if it has a lien. If you’re like me, and you got yourself into a car and no longer use it, selling is a great option. But I couldn’t sell it, and giving it back to the bank was not an option. Paying it off gives me the liberty to sell and make my money back (or at least some of it).
4. Start a 529
Now, this one does not apply to everyone, but if you are a parent and worried about finances, I know that your child’s education is on your mind as well. Most 529s require a deposit to begin — either $500 or $1,000. And just like an emergency fund, putting in that first deposit is always the hardest. But like mentioned above, after you start you become committed and will not want to stop.
You might think, why not just put money in a savings account? Well, a 529 is much more than that. The way it works is very similar to an IRA: it is a tax-advantaged investment plan. So, when your child is on their way to college, the money is not subject to taxes. And do not worry; if for any reason your child decided not to go to college, your money is not lost. Of course, the withdrawal is subject to a penalty when used for non-educational purposes, usually 10%. But what you have gained will likely be more than what you put in. And take it from me, someone who currently has a student loan headache — I would have given anything for my mom to have had the knowledge of what a 529 was.
5. Get life insurance
Now, life insurance is a very controversial topic. And I would recommend speaking with a professional that can evaluate your specific needs. (I also might be biased, because I sell insurance for a living.) But every day, I see how important starting a legacy for the family really is.
6. Get training
Nowadays, a better paycheck sometimes means simply acquiring a new skill. Pay for a coding class, a coaching hour, or use your refund to take a training in your field that will allow you to advance to a position earning more money.
7. Talk to your boss about that 401K
Having financial security means not being afraid to talk to your boss about what you’re worth, or what they can do for you. See if your company offers retirement plans; if not, do research how you can set one up on your own, and take that money to start securing your retirement.
It’s important to take advantage of any money that comes your way. Make sure you know where it’s going. The moment you’re no longer sending your money away to different companies is the moment your money becomes truly yours. Of course, there is nothing wrong with going on vacation or buying that bag you saw at Neiman Marcus. There is, however, a greater satisfaction when that bag is paid for by money you’ve worked hard to save.
Making just one change in the direction of your refund will save you time and money in the long run. Who knows — next year, you might have already taken care of everything and be able to afford an extra vacation without any problem.
Tiffany is your not-so-regular 22-year-old single mother living in New York. Trying to balance work, school, and a beautiful little human, and make fewer financial mistakes.
Image via Unsplash