Filing a tax return is no fun at all, but getting the money from your tax return? Now that’s the good stuff.
The question is, what do you do with that chunk of change? Are you part of the majority who plan to save their tax return or the minority who expect to spend it on a “splurge” purchase?
Or are you planning to do neither – or even both? – because you aren’t sure how to budget your tax return?
If that’s the case, have no fear. This is the start of Penny Calling Penny’s “Making the Most of Your Money” series, where we dive into the best ways to unexpected budget money coming your way. Today, we’re diving into the best way to budget your tax return.
Here’s how to budget, even if you’re new to it!
Being new to budgeting can make it overwhelming, especially when budgeting your tax return. More money can make the stakes feel high, and you want to make your budget work. The good news is that you’re already budgeting without even realizing it.
Everyone has a few monthly expenses, so they know the exact amounts and due dates. For example, there are car payments, loan repayments, rent, or a mortgage. When making a budget, these are called your fixed expenses.
Then, you have things that you know you’ll need money for every month, but the amount varies a bit. Things like filling your car with gas, paying your electric bill, or buying groceries are all on your radar, but you need an exact number. These are called your variable expenses.
Finally, you have what budgeting calls periodic expenses. These happen once in a while, but not every month. For example, paying property tax, yearly subscriptions, and car maintenance. These expenses are the things you might forget until they’re right on top of you.
When figuring out how to budget your tax return, you’re probably figuring out which category your tax return should settle down in. The answer is that, like any income, your tax return belongs in all types.
Methods for Budgeting Your Tax Refund
3 budgeting tips to make the most of your hard-earned money:-
1. Elizabeth Warren’s 50-30-20 Rule
Elizabeth Warren’s 50-30-20 Rule, as it’s called, is a great way to manage your tax refund—and it can be applied to any savings plan. This method is excellent because it helps you get organised and ensure you’re not spending more than you have in the bank. The idea is that you’re giving yourself a buffer to take a vacation or buy something frivolous without worrying about running out of money.
It allows you to spread out your spending across three categories:
50% for Needs (like food, water and shelter)
30% for Wants(these are fun things like going to concerts and eating out),
20% for Savings and Debt Payments.
2. The 33 Percent Rule is a simple way to ensure you’re taking advantage of your tax benefits
It is a simple way to break down your income so you can ensure that you’re not only paying the right amount of taxes and debts but also covering all of your living expenses.
The idea behind this Rule is simple: divide your pretax income into four equal parts, and
Allocate 25 per cent for taxes
25 per cent for housing
25 per cent for debts, and
25 per cent for living expenses.
This will help ensure that you never go into debt because of unexpected expenses or over-taxation. You’ll also be able to see exactly where your money is going and what it’s being used for so you can ensure that your savings account is getting the best bang for its buck.
3. Budget for Necessities
This three-step plan will help you budget for the necessities and leave you with some extra cash for everything else.
Let’s break down how you can use your tax refund in the most effective way possible.
Step 1: Set aside 35 per cent for housing: This covers mortgage or rent payments, utilities and insurance.
Step 2: Set aside 15 per cent for transportation: This includes auto loan payments, insurance, gasoline and maintenance costs.
Step 3: 15 per cent for debt reduction (pay down loans on credit cards, student loans and any other personal loans)
Step 4: Set aside 10 per cent for savings and investments: This covers contributions to an emergency fund, 401 (k) or Roth IRA.
Step 5: Spend 25 % however you want!
Budgeting is like a superpower!
Here’s why it’s worth the effort.
Learning to budget is learning a new skill and can feel like too much trouble. After all, you just filed a tax return, and learning how to budget your tax return sounds like even more work. So why bother?
Budgeting can make a striking difference in the way you handle your money. When you start a budget, you probably don’t know how much you spend on most things in your variable expense category. That can be a real problem.
When you examine how you’re spending your money, you might be surprised at where it’s all going. If you’re anything like me, you’re probably lamenting how expensive everything must be getting… until you look at your spending and realize that you have more control over your money than you thought.
Budgeting helps you get back in the driver’s seat. Learning how to budget your tax return might be the best thing you ever did for your bank account!
Upgrade your budgeting game with online tools
Alright, now you should either have your tax return in hand or know when it will be. The next step in deciding how to budget your tax return is deciding how you’d like to budget.
More and more people are budgeting online, using websites or apps, and it’s easy to see why. Budgeting online is incredibly convenient. Your budget is as small and sleek as your phone, and you can budget from anywhere. When your tax return (or paycheck) hits your account, you can put it into your budget.
Budgeting from anywhere with ease also makes it very easy to make changes.
Did you spend more on groceries than you expected? Do you need to cover an unexpected car repair? Budgeting online means you can deal with the changes right away.
The following budgeting questions are: “Which budgeting app should I use? And is budgeting online right for me?”
The number of budgeting apps out there can be overwhelming. A Google search for “budgeting app” yielded about 48 million results. With all these choices, you may feel paralyzed.
Here are a few options to get you “unstuck” and back to getting the hang of how to budget your tax return.
Looking to hit not two but three birds with one stone? Try Qapital, the all-in-one budgeting, banking, and investing app. Their Payday Divvy feature takes budgeting off your plate by allowing you to create a “set it and forget it” budget.
You can get started with Qapital’s PayDay Divvy feature, diverse investing, and habit-forming rules feature with their most popular plan. “Complete” is their mid-tier plan, costing just $6 a month.
Their 5-star rating, low price point, and seamless user experience make checking out Qapital a must when budgeting your tax return.
Intimidated by the thought of budgeting alone? Mvelopes is a life-saver for people who want their budget to be working as hard as possible right away.
On top of the usual budgeting set-up, Mvelopes gives you access to live help and their knowledge base with all their plans. And they don’t stop there. Their $9.97 mid-tier “Premier” plan gives you access to their video learning library, which can help you build your budget more effectively.
Want to inject your budgeting with rocket fuel? Try their “Plus” plan. For just $19.97 a month, you’ll get a dedicated personal coach. They’ll help you make a personalized financial plan and meet with you quarterly to review it.
All the help of a financial literacy expert for less than a dollar a day and thousands of positive reviews? You know Mvelopes had to make it on our list. When figuring out how to budget your tax return best, extra help is always a big plus.
Getting used to budgeting and learning how to budget your tax return can be a monumental task. Fortunately, YNAB is here to help. The acronym stands for “You Need A Budget,” but don’t let the simple name fool you.
YNAB has one of the largest financial help libraries out there. They have help with everything money, from learning how to budget to handling finances with a partner.
Their library isn’t just static, either. You can find their supportive community of over 200,000 people on Facebook. You can ask questions, share successes, and get advice. On top of that, their weekly email newsletter gives tips and tricks to make the app fit your finances like a glove.
YNAB doesn’t have tiered plans. You’ll pay one flat rate of $14.99 a month, and they offer a discount when you buy an annual subscription. The supportive community, free library, and excellent design all tie up into one must-have app for budgeting your tax return and your regular income.
Looking for a free budgeting app? Look no further than Mint. This free budgeting app comes from finance giant Intuit, which owns TurboTax and Credit Karma. And it’s absolutely loaded with free features.
You can track spending and saving, monitor your credit score, and track your bills, all in one place. You never have to pay to use Mint, but you can add individually priced services like bill negotiation and financial planning.
When you’re learning how to budget your tax return and want to save every penny, check out Mint.
What’s the catch to budgeting online?
The short answer: there isn’t one!
The longer answer? Your personality and budgeting situation are totally unique. What works for one person may not work for another, and getting started with budgeting your tax return is the same.
Some people prefer to avoid paying for a subscription or dealing with ads. Maybe you’re an “out of sight, out of mind” person, and a budgeting app gets lost in a folder.
You might need more time to make changes when you can budget from anywhere. (Don’t worry, it happens to us all from time to time.)
The good news is that you can overcome most of these issues with the practice. The more you get used to budgeting, the more natural it’ll feel.
Ready to take your tax return to the next level?
When it comes to financial freedom, budgeting is a crucial piece of the puzzle. Learning how to budget your tax return is the perfect way to start yourself on a better financial path.
“Extra” money, like a tax return, can give you an edge when escaping debt and building wealth. When 7 out of 10 people live paycheck-to-paycheck, falling behind is difficult.
Your tax return can give you some breathing room. You can bulk up your savings, pay off debts, and start investing. In a word, you can begin building better financial habits. Better financial habits today will start to snowball.
Getting your tax return is always great, and the snowball effect can make that great feeling even better. When investing and saving, you can see those good financial habits paying off in real-time, month after month.
Getting the hang of budgeting your tax return is hard, but we’re here to help. Join our community and find tips, tricks, and support for building those healthy habits. From your tax return to a regular payday, every Penny counts!