When I was 14, I got my first real job. It wasn’t much–working part-time at a warehouse for minimum wage–but getting a paycheck was so exciting! What was even better, though, was tax-time. I really looked forward to it because I’d seen those deductions on each paycheck and knew I’d be getting some of it back.
Then I did my taxes and calculated my rebate. Something like $100, which was more than I was making each week. As soon as I’d come up with the number, I was thinking of all kinds of ways I could spend it. It was like getting free money. I spent some of it before I even had it. And at 14, I wasn’t disciplined enough to even make a sheet of how much I was going to get and tally off how much I was spending.
Fortunately, I was disciplined enough not to spend beyond my means or anything.
Eventually, I became more disciplined. For example, when I was saving for a trip to Europe, I put about 2/3 of the rebate in savings and spent the other 1/3 on fabric. But I still didn’t use a sheet to figure out specifics. Now any rebate we have (both the economic stimulus package and any money we happen to have overpaid in taxes) will go to debt repayment.
Here are some things I would have told my younger, less-disciplined self:
This is not free money.
The government was holding onto this money at in a 0% interest no-access account. It’s not nearly as exciting as you think. You earned all this money, so treat it that way. It’s ok to want a nice cup of coffee, as long as you remember that you’re really paying for it from your salary. It’s not free coffee.
Don’t spend your rebate before it arrives.
It’s ok to make plans for the money, but don’t spend it. Until the check clears, it’s not actually your money. And to my older, slightly better-disciplined self, this includes not using it for debt repayment before you get it.
Do avoid the “well it’s ok because we have this money” mentality.
One big problem with coming into unexpected money is that it makes you feel richer. You know you have increased spending power and you start to buy lots of little things. It’s easy to justify the purchases as “with the rebate money.” Those little things add up. You may find yourself spending twice as much because you had this mentality.
Do keep some sort of tally.
(it’ll help you avoid the previous one.) If you’re going to be spending it on a few different things–trip to the fabric store, special chocolate bar, dinner out–and can’t budget specific sums for each one, keep a tally. I’d advise making a budget as well, but if you underspend in one category, the tally/spreadsheet lets you know just how much you really have left.
So you can’t think “Well, I didn’t spend up to budget on X, Y, and Z, so I’ve got money left for AA.” You need to know exactly how much money you have left for AA, not just some fuzzy idea. I did ok on fuzzy ideas for years, but concrete numbers are far superior.
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Good points Mrs M. It sounds like your government are giving you all your own money back to encourage you to spend more. The idea retaliation would be to save it instead.
Good advice MM. Ours will be going in the savings account with the rest of our short term-savings. We’re saving to have some electrical work done to the house and garage so we can get a new garage door and actually park the car in there to get it off the street. This will just help expedite that project.
But, very good point with not speding it before you get it!
So much for helping to stimulate the economy..I have zero intention of spending the rebate check if I qualify for one. It’s going under my mattress so to speak!
My oh-so-sexy 2008 IRA will be the beneficiary of this particular check… 🙂
Very good points. In past years, I would do our taxes and file as early as possible and by the time our refund arrived it was already spent.
This year, whether it be our tax return or our “economic stimulus” refund, it is all going directly into savings.
I wonder, deepali, if investing this money will sort-of help boost the economy anyway.
I think so. Investing in a company is second-only to buying its goods, in terms of bottom-line.
RIght on, Mrs. Micah!
Investing is actually probably better for the economy than spending it on consumption goods. There aren’t too many economists who still cling to the so-called “paradox of thrift,” though there are some. Even putting it under your mattress bids down prices which helps the economy.
Nobody should concern themselves that they’re hurting the economy by not spending money.
Luckily, I’ve never considered my tax refunds as being “free money,” the way I tend to do with monetary gifts.
I’m still working on determining the best approach for gifts. Should I use them to actually buy myself a gift or save the money, use it to pay off some debt, etc?
Usually I use monetary gifts to buy something I’ve been wanting but can’t get for myself. It’s a good way to splurge on occasion without blowing my own budget. Of course had I not done that over the years, the money could have gone to savings or something else practical and might have made more of a difference in my life that way. Still every so often a little splurge is nice, and using gift money to do it helps prevent a feeling of deprivation that might lead one to end up using their own earned income for splurges.
With tax refund money of course it is different I think because as you pointed out that really is our own money given back to us as if it were a gift. I think this post is a great reminder to not view that money as “free,” because it really isn’t.
Hi mrsmichah! Loved this post. I know exactly what I’m going to do with my rebate-debt repayment and maybe something that I’ve been waiting to buy. I have a list of things I’m waiting to buy until I can afford it. It will either go towards a hard drive or something really cool like a vacation on the beach, but we’ll see what happens when the check actually arrives! The point is I have about about between $2800-$3500 to pay back before I go to grad school in the fall so anything that can help pay off the debt will be helpful : )
We try to not get big refunds, since that’s just a free loan to Uncle Sam over the previous year. But we usually still get something (I think last year we got $600). This year, any refund we get will go into our HSA if we don’t have it maxxed out yet, or into my husband’s IRA if we’ve already finished the HSA.
I’m having a baby in June, so you can imagine where any money will go. 🙂
Though seriously, we have been saving money in our short term cash fund to take care of unpaid time off for maternity leave (I get some time, but not enough to take 3 months) and the extra costs of daycare for the first year. My estimates show that in order to keep my short term emergency fund at a level I like to have it at, I need to save an extra $1300 sometime in the next year. So this would certainly do that.
Unless, of course, this is an advance on our 2008 tax “refund” and not a straight out refund. I aim for 0, which would simply mean having the money for a little more time before I have to give it back.
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