Unexpected Income: The Tax Refund
Monthly budgets are to make sure that our regular income (which in the book we call expected or predictable income) covers all our predictable expenses. We use a 4 week month to figure out monthly budgets in our book because every month has at least 4 weeks in it, thus weekly pay check earners can predictably expect 4 paychecks, biweekly earners can expect 2. It simplifies the math to help us get into regular spending and savings habits.
However people who get weekly or biweekly paychecks will occasionally get an extra one every few months. Most of us at this income level get an income tax refund, and there are many other instances like birthdays, inheritance, contests, overtime, or lucky finds which may put a little extra in our pocket. We refer to this as Unexpected Income, not because it's a surprise, but because you don't expect it every month. It's tempting to use Unexpected Income as plurge money but mastering that impulse can help you get ahead financially.
We make mini-budgets for Unexpected 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
To illustrate, I got my tax refund back today $444. I need to renew my drivers liscense, so I set $19.50 aside for that (left it in my checking account). I tithe, so I set $44.40 aside for that. I owe my dad $26.21 (small debt), because he bought me printer ink. So I set that aside for him. That leaves me with $353.89. If my Emergency Fund was low, I'd apply it there, but my Emergency Fund is actually okay. I don't have any large debts, so I can move on to Priority #5. There are a lot of things that would be fun to do or buy with that money, but what's most important to me now is getting a new car and/or computer sooner rather than later. So I'll apply the money towards that, stashing it into my savings account to get me closer to my goal.
Granted in other circumstances a car or computer might be a necessity. I may reach that point in the not too distant future. But it's still sitting on the line between a want and a need, so the debt to my dad takes priority.
I know it's a bit early for most people, but do you have a plan for your tax refund? Wanna share?
However people who get weekly or biweekly paychecks will occasionally get an extra one every few months. Most of us at this income level get an income tax refund, and there are many other instances like birthdays, inheritance, contests, overtime, or lucky finds which may put a little extra in our pocket. We refer to this as Unexpected Income, not because it's a surprise, but because you don't expect it every month. It's tempting to use Unexpected Income as plurge money but mastering that impulse can help you get ahead financially.
We make mini-budgets for Unexpected 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
To illustrate, I got my tax refund back today $444. I need to renew my drivers liscense, so I set $19.50 aside for that (left it in my checking account). I tithe, so I set $44.40 aside for that. I owe my dad $26.21 (small debt), because he bought me printer ink. So I set that aside for him. That leaves me with $353.89. If my Emergency Fund was low, I'd apply it there, but my Emergency Fund is actually okay. I don't have any large debts, so I can move on to Priority #5. There are a lot of things that would be fun to do or buy with that money, but what's most important to me now is getting a new car and/or computer sooner rather than later. So I'll apply the money towards that, stashing it into my savings account to get me closer to my goal.
Granted in other circumstances a car or computer might be a necessity. I may reach that point in the not too distant future. But it's still sitting on the line between a want and a need, so the debt to my dad takes priority.
I know it's a bit early for most people, but do you have a plan for your tax refund? Wanna share?