Tax season is in full swing, with more than 39 million returns already processed, thanks to the ruthless efficiency of the Internal Revenue Service, America's second least-loved federal agency.
Yes, I said second least-loved, even though most citizens will assign the top ranking to the administrators of America's annual financial colonoscopy. But have you ever visited the offices of the Bureau of Alcohol, Tobacco, Firearms and Explosives? Let me tell you, it is nowhere near as much fun as you would expect. Despite having a name that sounds like it ought to be on a chain of Texas convenience stores, those guys have absolutely no sense of humor when you walk in and announce, "OK, I brought the pizza!"
It's understandable that a certain number of recalcitrant taxpayers might harbor ill will towards the IRS, as do entire classes of exsanguinated stones and turnips. But most of us should truly appreciate the technical wizardry Uncle Sam's bagmen bring to bear during filing season. These days, if you file your return electronically and have your refund direct-deposited to your bank account, you can get your dough back in less than a week. And, with refunds averaging $3,224 so far this year, that's a welcome and sizable boost to your bank account.
Splurge with bit of refund
Which prompts the pop quiz: What's the best use of your refund check? (OK, everybody who answered, "Big-screen TV!" put your hands down. Also, those of you who said, "Vacation!" And these inspectors from the ATF would like to have a chat with that guy in the back who hollered, "Ammo!")
A bit of a splurge should definitely be part of what you do with any windfall, whether that's a tax refund, bonus or loose change scraped out of the snowbanks at the Burger King drive-thru. But it's more important to target the bulk of your extra cash to basic financial priorities, in this order: Emergency fund, cash cushion, debt reduction and savings. So consider:
Do you have an emergency fund?
Yes — I have at least two weeks' worth of take-home pay safely socked away and I am working my way up to three to six-months' worth of savings.
No — But tell me again about that Burger King drive-thru.
An emergency fund — even one as small as two weeks of your pay — is essential to keeping yourself financially secure, and should be your first priority. Otherwise, car repairs and other unexpected bills will throw you deeply into debt. Also, no matter how cold it gets, no "emergency" involves a weekend trip to Miami Beach.
Have you built up a cash-cushion for non-emergency expenses, such as annual insurance payments, professional dues, summer camp, back-to-school costs, vacations and holidays?
Yes — When Pancake Day rolls around on March 4, we will be makin' it rain up there at the IHOP.
No — When the car insurance bill shows up we'll just go back to living on generic pot pies and Tang.
One of the biggest challenges to a balanced family budget is forgetting to set money aside for expenses that don't come up every month. You don't want to use your credit card to cover your property taxes, back-to-school supplies, homeowners insurance or even your stockpile of Tang.
Have you paid off or do you have a systematic plan to eliminate all credit-card or other installment debt?
Yes — We just have the mortgage and a car payment.
No — While I was Christmas shopping I think I melted my Visa card.
Tackling revolving debt is the next step after starting an emergency fund and covering your living expenses. Once you have a basic rainy-day account started, direct at least half of your windfalls toward paying down debt. Low-rate mortgages and car loans don't need to be a priority, but do cover your shortfall in office lottery pool; your coworkers are getting cranky.
Are you regularly saving for retirement and other financial goals?
Yes — I save enough in my 401(k) to max out my employer's matching contributions.
No — But I found a sweet parking spot down by the river and I'll buy a used van with my AARP discount.
If your workplace savings plan matches your contribution, save up to that level and use your refund to offset the drop in your take-home pay (or better yet, adjust your withholding so you don't need to get a refund). If you've maxed-out the matching contribution, don't get one or don't have a workplace plan, open a Roth Individual Retirement Account.
Remember: While living to an old age is better than the alternative, there's nothing worse than being old and broke. (Unless you're old and broke and a married to a marimba player, because 35 years of hearing "Under The Sea" will do things to a person.)
Finally, did you leave cash to pick up some special swag?
Yes — But don't tell my wife. Or the ATF.
No — I've got too many important things to do with the money.
You are just as important as your MasterCard balance, your dog's worm pills or being able to buy real Metamucil in your dotage instead of the generic. A new purse, designer shoes, fishing rod or a nice dinner out are all within reason, just don't go crazy. Even better: Use what you'd spend on a splurge to start a separate savings fund for something really special, and let that goal motivate you to put the rest of your finances in order.
Unless that goal is a marimba.
Brian O'Connor is author of the award-winning book, "The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese."