It’s that time of year. The time to do your taxes and perhaps get a refund.
And then comes the inevitable question: what should you do with your refund?
The best thing that my husband and I have ever done with a tax refund is use it to get our income a month ahead.
Let me walk you through it.
The way a budget generally works is you budget the money that comes in during the current month and spend the money as it comes in. Our income has always varied month-to-month, so budgeting this way ended up being stressful for us since we were never exactly sure how much money would be coming in the middle of the month and then at the end.
Then, we had an epiphany. Well, Ryan did, and then he had to explain it to me 23526 times before I understood it. What if we had enough money in our account to use the previous month’s income for the current month’s expenses?
That way, we would know, down to the penny, exactly how much we would have to budget in the month and all of the money would already be in our account.
The way it worked is that we took a tax return a few years ago and left the equivalent to one month’s expenses in our account. The next month, we used that money for our budget, and we knew exactly how much money we had to budget. As we were spending money in the current month, our income for the month was getting deposited into our account.
Then, when the next month rolled around, we used the previous month’s income for expenses.
In case that’s still confusing (seriously, it took me forever to understand the concept), here’s an example using made up numbers. Say that you typically bring home $5,000/month.
- March: You get a tax return of $5483.00. Put $5,000.00 into your checking account and leave it there. The remaining $483.00 can be saved, spent, whatever.
- April: Create an April budget based on the $5,000.00 that is in your account from your tax refund. As April checks get deposited, leave them alone.
- May: Add up what you made in April and budget that to use for May expenses. As May checks get deposited, leave them alone.
- June: Add up what you made in May and budget that to use for June expenses. As July checks get deposited, leave them alone.
- You get the idea.
Here’s another scenario assuming your tax refund won’t cover a month’s worth of expenses:
- March: You get a tax refund of $3500.00. Put that in your savings account.
- April: When you create your April budget, add some money to the $3500.00. For easy math, let’s say you save $500.00. Budget as you normally would.
- May: Save $500.00 and add it to the now $4000.00 sitting in your account. Budget as you normally would.
- June: Do the same as May.
- July: Do the same as June. Now you’ve built up $5000.00 in your account (essentially and extra month of income).
- August: Your August budget will be based off of the $5000.00 in your account. As August checks are deposited, leave them alone.
- September: Add up what you made in August and budget that for September expenses.
For us, there are a lot of advantages to managing our money this way.
- As we spend the money we made in the previous month, current month paychecks are coming in, so we’re at a very decreased risk of miscalculating and overdrawing our account. Which is hard to do when you’re working with a budget, but it’s still always a fear of mine.
- Our account balance never looks scary as the end of the month rolls around because the current paychecks are in there making it look pretty.
- If unexpected expenses come up, we can cover them and then we make sure to budget them into next month. Technically, we’re borrowing money from our future selves to pay for current expenses, so we try not to, but sometimes it’s a necessity.
Hopefully you’re not hopelessly confused at this point! Managing our income this way has truly made things so much easier. If you have any questions, don’t hesitate to comment, email, or DM me @thesimplegirlsguide on Instagram!