Why I Never Trust Myself to Save My Tax Refund (and Neither Should You)

Every year before I file my taxes, I take out a pen, draw out a plan and swear an oath.

“I, Stephanie, do solemnly swear that I will use my tax refund for the purposes I outline now, and will only spend within certain predetermined percentages regardless of the amount of my refund and no matter how many incredible sales are happening at DSW when my refund hits. So help me God.

Seems like overkill. But I know if I don’t make this promise to myself, if I rely on “good intentions” and a “we’ll-just-see-how-much-my-refund-is-and-then-I’ll-decide-what-to-do-with-it” attitude, then I’m screwed.

The Trouble of an Oath-less Tax Refund

As a twenty-something and a fairly new member to the adult workforce, there’s nothing more depressing or sobering than seeing all of those nasty federal and state taxes coming out of your paycheck. If I’m a naive young professional earning $50,000 a year, I expect $50,000 a year, damn it. And it see otherwise in a paycheck just stinks.

The salvation to this depressing adult job rite of passage? A once-a-year bonus from the government, a.k.a your tax refund.

As anticipated as Christmas (or at least for me), it’s the one time of year when you actually have cash to spare. For once, you have extra money, sometimes the equivalent of an extra paycheck. As you piece together your W-2’s and 1099’s for the year, as you trudge through screen after screen of TurboTax or H&R Block, the one thing that keeps you going is that promise of a refund. It’s that little ticker at the top of the screen, tempting you with a reward of $500, $1,000 or even $1,500 if you just finish your paperwork.

I’m drooling just thinking about it.

When I press the “Ready to File” button, I know I’m only days away from a fat deposit in my bank account. My mind starts racing with possibilities: an entire new wordrobe, extravagant dinners, luxurious vacations… It’s at this point that my Financial Conscience appears on my shoulder, reminding me how nice it will be to use my refund to pay off my student loans and contribute to my long-term savings goals.

Buzz kill.

But I know it’s the right thing to do. Maybe I’ll only use a few hundred dollars of my refund for the things that I want… the rest will go toward the future. I’ll be happier in the long-run.

A week later, the payment hits. Last year, a whopping $1,200 was deposited into my checking account. Cha-ching. Remembering that I should save some of this money for my savings account and debts, I vow to only spend a little on a pair of boots I’ve been eyeing.

But then there’s that trip to Seattle I was going to take in May… and I really haven’t bought a cocktail dress in a long time… and what about that new tapas bar I’ve been meaning to try…

Soon enough, the “couple hundred” I was going to spend on things I want turns into a pile of expensive justifications, with little leftover to save for the future.

Human Behavior” 1. Financial Foresight: 0.

My 3-Step Personal Tax Refund Contract

Given my track record and the fact that I am a human being full of flaws, I’ve decided to enter into a contractual obligation with myself each year as I prepare to file my taxes (I have to do this before I even begin to file… once I see even an estimated refund, I start spending that money in my head!).

Here are my three rules I stick to every tax season:

1. At Least Half of My Refund Must Go Toward Debt

This is a no-brainer rule for me, since I still have over $9,000 in student loans. Paying down my student loans is the most important financial goal in my life, so I’m going to allocate at least 50% of my refund to my debt.

2. At Least 25% of My Refund Must Go Toward Long-Term Savings

After paying down my student loans, it’s easy to take the rest of my refund and run with it. But I also have a lot of long-term savings goals that could a little boost. I’ve promised myself that at least half of my remaining refund (that’s 25%, if you’re keeping score) needs to go toward a 2-year-or-longer savings goal.

3. Spend the Rest of My Refund Judgment-Free

This is actually the hardest rule of them all. I’m still prone to judging every purchase I make, so the freedom of using a decently large amount of money for whatever I want feels really liberating. And it helps me indulge on a few impulse purchases that have been building up over the last few months 🙂

So if you’re gearing up to file your taxes or you’re already anticipating your refund, take a second to think about what’s important to you financially and where you would like (and need) this money to go. It’s easy to react on impulse and emotion when your refund hits, so prepare now for what you’ll do with that moolah later.

And I have a drafted contract, if you need one 🙂

Tell me: have you already decided what you’ll use your tax refund for this year?

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