Hurray for Tax Refunds
I got $475 back this year. In our book, we divide income into two categories expected (or predictable) and unexpected income.
Expected income is income you regularly receive every week or month. Unexpected income is any money that you don’t expect on a regular monthly basis. Because your tax refund comes but once a year and you don't know what it will be until you sit down to figure out your taxes it falls in the category of unexpected income.
We encourage you to make a budget/plan for your unexpect income using these priorities:
Priority 1: Needs
Priority 2: Small Debts
Priority 3: Emergency Fund
Priority 4: Large Debts
Priority 5: Big Dreams and Entertainment
At the moment, my basic needs are met, and I don't owe anyone money. However, I really need to get my Emergency fund built up, so the entire amount is going straight to building up my emergency fund.
Since we're in a recession, I know Suze Orman has been suggesting increasing your Emergency Fund to 8 months of living expenses. It's not a bad idea. At least 6 months is your goal. More is nice, but you don't want all your eggs in one basket...I'd say absolute max on an emergency fund is a year of living expenses. If you've got that much saved up, it's time to look into diversifying with longer term investments that could give you a higher return (or at least break your money into different accounts).
One of the concepts they discussed in my small business class is that businesses should try to keep an emergency fund/accessible cash too. Though they called it something else and used different math to figure it. Their math involved taking the cost of daily operations and multiplying that by the number of days in your cash flow cycle. For instance, if your cost of doing business is $100 a day and your cash flow cycle is 30 days, you'd want to keep at least $3,000 in cash around to keep things going and more than that isn't a bad idea. The cash flow cycle math was a little confusing, but I grab onto the concept of building up cash for my business. So seperate from my personal income, I'm also starting to slowly build up an emergency fund for my business. I thought I'd throw that out there in case one of you is also operating a business either full time or on the side.