How to budget tax returns?
Our tax return is likely to be somewhere in the $7,500 range this year. [Does snoopy dance] How would you use this windfall?
We're a family of four with one income and some student loans bridging the bit that we can't quite cover on our income. No buffer since we've been putting every spare penny towards consumer debt and trying to minimize how much we borrow.
We have about $3k in an emergency fund, some revolving debt payments (about half of them interest-free but need to get paid off late this year), $1700 in credit card debt, and a few hundred dollars saved for a down payment on a car (current car is 16 years old, so probably imminent).
A) Pay off the credit card, start a buffer, and knock out short-term interest-free debts to free up cash?
B) Pay off the credit card and our two short-term interest-free loans and then use the money we've been putting there to save for a new car?
C) Pay off the credit card and put the rest towards our new car fund?
D) Something else?
What say you, wise ones?
Congratulations on such a large return. That is wonderful.
I hate seeing questions without answers. Problem with your question is you are the only one who can answer it, in my opinion. You have many places that need the money from your return. I also have many places I would like to put any unexpected income. When I get that income, I choose which is most important today.
I agree with TryingToGetAhead . I am a single with no kids and no debt, so my perspective is just not going to be very pertinent to you. But in the event that just reading what others would do might provide some food for thought... I think I would look at breaking the return into chunks. My first priority? Top up my known true expenses for the year and an emergency fund equal to one month's income. Is there any left? My second priority would be to eliminate as many of my monthly debt payments as I could. Is there a debt (or more) that can be totally eliminated? I'd be less concerned with interest and want to get rid of as many payments as I could to give me back more of my monthly cash-flow. Slogging through life with an encumbered cash-flow is so laborious.
I'd take it as an opportunity to set yourself up for success. I agree with Michele (I usually do). Cover your true expenses, get yourself buffered. That will give you breathing room that will enable you to make good decisions about your cash flow for months to come. If there is anything left after that, throw it at the debt you hate paying most. It sounds like you've been able to cash flow your debt thus far, so you can keep plugging away at it. Cash-flowing debt and living expenses each month makes it hard to build up a buffer - a windfall is a great opportunity to do that, then you can go back to dealing with the debt.
If you do wind up needing a car sooner rather than later, having a buffer will make it easier to shift things around and deal with that.
I had a tax windfall last year - I struggled with what to use it for - adding it to my buffer seemed like it wasn't doing anything for me, but I am so glad that I put it there. Being able to budget further into the future has been a very real benefit for me each month this year.
I would do one of two things. Either a) nothing. Stick to your plan, if you are hammering consumer debt, keep hammering consumer debt.
Or b) there is great clarity to be had in budgeting a month at a time. If you are having trouble making ends meet, being buffered will help to see the ends very clearly and reduce the gap. That would be what I would do, but the advice I've been giving people lately is not to change their plans due to a windfall and only use any excess for other goals.
We are also a single income family of five. My wife stays home and schools the kids (in other words, she works way harder than me :) We struggle on a monthly basis with managing all the expenses, we are getting ahead but it is slow.
A couple years ago we had such a large return similar to yours, that I decided we needed to adjust our W-4 withholding to increase our monthly income, in other words not wait to get a lump sum with taxes. I used the worksheet and the calculator on the IRS website and it said to put in 13!!!! The only Federal taxes taken out is pretty much just for overtime pay, and thanks to credits we still got over $800 back last year. Just a thought to help increase the monthly budget.
We try to follow Dave Ramsey's baby steps as a guide. That being said we focused on paying off our debt, first but not to the point where it made it impossible to live. Got to take life as it comes and plan the best we can. We paid off the debt while also trying increase our AoM to help insure we didn't fall back in debt due to not leaving any money for life's surprises.
That being said perhaps: Pay of CC (I would at least do this to avoid paying more in interest), Start Buffer, Save some for car, and maybe take care of the lowest loan? Whatever you decide, I would just suggest you don't make your financial situation get more stressful by not having some sort of a buffer. It really helped us with being able to move money around and not use our EF in the process. Good Luck!
Weekly check-in. Still no check from financial aid. We're pinching pennies and are paycheck-to-paycheck in a way that we haven't been in years. The good news is that we haven't overdrawn in months - thank you YNAB - and we used to do it pretty routinely. And I feel more than convinced that things would be a lot worse if we didn't have YNAB to help us keep such close tabs on where our money is going. But we have now robbed our emergency fund to the tune of $2,500 to make up for the student loan that the school has given us but not actually paid us. This is getting... old. My car died this week. It's 16, with a blue book value of $300-$800. Though we have one more thing to check at the mechanic, I suspect this is the death knell. Thankfully, my good friend's shitty luck of a broken ankle means she can lend us the car she can't drive, which gives means if we do have to buy a car we need to do it quickly but it's not an emergency. No one needs to negotiate with a car dealer when they're over a barrel. But I am worried that we're going to have to buy a car before we get the student loan check to refill our emergency fund/car down payment fund. Gaaaah. I am sunshine and roses this week. And so my mantra: the mortgage is paid. We have food, electricity, heat, and health insurance. The rest is all detail.