Pleasure doesn’t necessarily conflict with sound financial practices, as long as the refund is part of a structured plan. Having fun even as you make smart decisions about your money requires being honest with yourself.
Many find that to be a challenge when it comes to personal finances, said Rett Dean, a principal with Riverchase Financial Planning LLC in Lewisville, Texas.
“They fudge a little bit or they put a rose-colored glass around something that may not be as rosy in reality,” Dean said. “Don’t take the enjoyment out of dollars you got back from the government, but at the same time make sure you’re being objective with yourself so the short-term enjoyment has a long-term benefit.”
Dean suggested treating a pleasure purchase, such as a new television, as a reward for using at least part of your refund to improve your financial security. Concentrate on high-interest debts first. Debts with lower interest rates, such as student loans, aren't as critical as long as you pay the minimum. If debt isn’t your biggest concern, Dean said, it’s “as critical if not more critical” to maintain a healthy “rainy-day fund.”
The rule of thumb for a reserve fund is three to six months of expenses, Dean said, though a specific recommendation is difficult to make without knowing an individual’s financial circumstances.
The undefined nature of tax refunds can make it difficult to budget them like regular income, which further encourages treating them like “found money.” The trick, then, is to make a plan ahead of refund time while basing your daily budget on your regular paycheck.
“A lot of times I hear about people who say, ‘When I get my tax refund I’ll do that,’ ” Dean said. “The concern and fear I have when I hear statements like that is they are counting on it being there for them. A better way to look at it is, ‘Am I being efficient enough with my money throughout the year, as opposed to waiting on this?’ ”