When you receive a large lump sum of cash what do you immediately think of doing with it? Spend it? Save it? Invest it? Pay down debt? There’s no one right answer and there may even be room to do all of the above, depending on your personal financial situation and goals.
Invest
Look, I’m a financial planner. My immediate thought is to pay yourself first and increase your savings and/or investments. If you’re not saving and investing a significant portion of your income already, then this can be a great way to get started. By now we all know how important investing for our future is, but most young professionals don’t take it as seriously as they should. Any extra money that you get from a bonus or tax refund could be a great opportunity to do something that your future self will thank you for.
Pay Down Debt
On the other hand, if you have high interest rate debt, then applying your extra cash to pay that down may be more beneficial. Using your money optimally is just a math game that depends on the interest rate on your debt and your expected rate of return of your investments. However, not everyone is motivated by getting the best rate of return possible for their money.
Some people really hate debt and would rather pay it down as quickly as possible, no matter whether it’s the most mathematically optimal decision or not. That’s a fine option as well, but we need to make sure that it makes sense within our overall financial plan.
Spend
I’m not telling you that you shouldn’t spend any of your tax refund or bonus. Everyone needs to be able to spend on things and experiences that they want and that make them happy, but you shouldn’t let doing so get in the way of reaching your financial goals.
This is why it’s so important to have your goals for what you want your money to accomplish for you explicitly stated. Otherwise, you’re likely to waste a lot of money (and a lot of progress towards your true goals) by spending on things that don’t really make you happy or provide you with much value because you’re trying to keep up with the Joneses.
Save For A Short-Term Goal
If you don’t have high interest rate debt and you save an adequate amount, then why not get started on saving for your summer vacation or plan a trip if you don’t have one already planned? I’m always going to value spending on travel and other experiences much more highly than spending on “stuff”, but if stuff is what makes you happy, and you’re in a good spot, then go ahead and buy that thing that you’ve really been wanting – within reason of course.
My Goal
My goal is to save/invest 50% of my bonus and tax refund, at least. Not only will this help me get a jump start on my annual savings goals, but it will also help to reduce lifestyle creep which can become a problem if spending increases over time without savings increasing as well.
The beginning of the year has seemed even busier for Amanda and me than the end of 2018 did, which has led to a little bit more spending than I would have liked. However, most of that spending has been on experiences that I’ve enjoyed, rather than things that I’d probably not care about in a couple of months, so I can’t be too upset. We still have a couple more weekends left that are booked, but I’m confident that I’ll be able to save at least half of my bonus and tax refund not only for long-term investing, but also for short-term goals such as our wedding and travel.
