Tax & Bonus Windfall- What To Do?


The first four months of the year can be a tremendous time for an influx of money due to company bonuses and tax refunds. My company pays out the previous year’s bonus in March and we are accustomed to getting our tax refund around this time too. If you are not careful, any money you receive during this time can be quickly squandered on frivolous things that don’t matter and ultimately don’t help you achieve your goals. Before you go out and spend your bonus and/or tax refund money, re-asses your goals and take your time in making spending decisions.

Re-asses Your Goals & Priorities

Take a look at your short and long term goals and asses where you are with each of them. For example, is your goal is to be debt free, build your sinking funds or invest more? What is the order of your goals? They should have an order of most important to least important. What do you want to accomplish first? What can wait until later? Yes, it’s possible to attack goals simultaneously but you should know their priorities so that you can come up with a strategic plan on how much money and time you will allocate to them.
For reference- sinking funds are expenses you don’t necessarily pay for every month but anticipate to pay throughout the year or at some point. For example, in 3 years we may need to buy a new car due to our growing family, because of that anticipated cost, we would like to save $5k a year for the next 3 years to have a car sinking car replacement fund of $15K (that plus the trade in value of one of our cars should allow us to pay cash for another car). Or, let’s take something more “fun”, say we want to budget $4k this year on family trips and vacations. We would put aside $333 every month for a year until the vacation sinking fund is fully funded to $4K.

We are using my bonus and our tax refund money to accomplish our investing and saving goals for the year. The plan is to fund 2 Backdoor Roth IRA’s and put money aside for a potential upcoming medical expense. This is in complete alignment with our short and long term goals, saving aggressively and having no debt. The backdoor Roth IRA’s provides us with another savings vehicle and putting money aside for an upcoming medical expense now will keep us from having to go into debt.
We also want to put money towards our vacation sinking fund, but it’s more important for us to take care of our investing and saving goals first. Once those goals are accomplished and squared away, we will throw our money into the “fun stuff” like saving for vacations and buying new furniture.

Take Your Time, Don’t Do Anything

Just because you get the money now, doesn’t mean you have to spend it now. If you are at a limbo of how to spend your bonus and/or tax refund, wait until you have a clear picture of what you want to do. You don’t want to make a decision in haste only to regret it later. Sure that new bag or electronic device looks tempting to buy but does that spending align with your goals and what’s important to you? I’m not against “treating” oneself to material things and spending on the fun things in life. I just have a different thought process of what “treating myself” means. For me, treating myself is investing and saving first so that I can spend on the fun things without guilt or hesitation later.
Take a few days, weeks or even months to figure it all out if you have to. Just don’t rush into spending the money because it’s there. Maybe you take half and pay down debt and take the other half to help fund your vacation sinking fund, it’s up to you to decide. Whatever you do, just be clear on what your goals and priorities are then spend wisely and accordingly.

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2 Responses

  1. I totally agree with taking your time spending your tax refund. Some people already spend their refund check on unnecessary things before they even get it. I have never been one of those people. I like to use it wisely since it is the only large sum check I will get (other than my work bonus) a year.

    When it comes to your different funds (vacation, sinking etc), do you you keep it in one bank account? Do you just use YNAB to keep track of your balance?

    1. Thanks for reading Shaleia! I have them spread out over 2 bank accounts but keep a track off all my sinking fund balances through YNAB. It really makes everything easier.

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