It’s that time of the year again: tax time. When you’re a family paying off debt and living paycheck to paycheck, anticipating a windfall like your tax refund is like looking forward to Christmas. You’re not quite sure what that pretty package has in it, but you’re certain it’s going to be amazing! And you already have about fifty million exciting ideas for how to use that refund.
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The vacation we can never afford? That new couch we’ve been eyeing but could never quite justify? A nice sit-down dinner where everyone orders their own meal, complete with drinks and dessert (unheard of)? Oh, the splurge!
If you’re like me, a tax refund holds the promise of a little break from a perpetually tight budget and the constant threat of financial stress. You want to take a breather, sit on the side of the road and stop pinching pennies for just a while.
A Pleasant Surprise
We sat down one Saturday in March to do our taxes, and boy were we nervous!
Last year, due to various circumstances, we ended up owing taxes for the first time ever. Talk about a major disappointment (oh baby, why oh why couldn’t you come before January 1 like you were supposed to!).
This year? Night and day different.
We tentatively added each new piece of information and clicked “next”, afraid that number would change in the opposite direction. But to our surprise and delight, it didn’t! The number kept going up…and up and up and up. Our grand total refund? $6,100!
Ok, so we did go to the mall food court to celebrate, and yes, we ended up buying some cheesecake slices to share at the Cheesecake Factory too.
But after that, even though we’re tired of living frugally and trying to pay off debt, we knew we needed to use that refund wisely to position ourselves for eventual financial freedom.
Financial Stress & Homeschooling Families
Homeschooling families are particularly vulnerable to financial stress. Many families are living off a single income and anticipate doing so for years to come.
Juggling budget tracking and bill paying while handling the education of multiple kids at home all the time can be highly stressful. And then there’s the never-ending game of trying to cut costs.
I myself have been vulnerable to missed bill payments and budget fails. While I have a naturally frugal bent, I too get tired of counting every dime, especially when it doesn’t seem like we are making any headway on our financial goals.
That’s why I want to encourage you to use your tax refund strategically to simplify your life and reduce stress. Under stress, you are far more likely to forget the budget and go further into debt, which will negatively impact your homeschooling experience. It could even cause you to throw in the towel altogether!
Don’t let finances be a roadblock to homeschooling or growing your family! Here are four ways we used our refund this year to reduce stress:
Last year, I finally understood the very real need for an emergency fund. I knew that theoretically it would be nice to have one, but we spent several years doing full-time Christian ministry and living on varying levels of support/gifts. During that season, I learned to trust God for our provision like no other time in our lives.
Savings? Ha! Not even an option. We just tried to keep our heads above water, pay the bills and student loans, and stay out of further debt (we only had student loans at the time). But after years of being uncertain what our income would be month to month, trust morphed into blissful ignorance.
I didn’t track our expenses at all. We simply lived frugally and trusted the numbers would work out. Thankfully, they did.
Life Happens: Expect Emergencies
When we transitioned back to a regular income last year, however, that habit of blissful ignorance came back to bite me. A routine oil change uncovered an exhaust leak in our new-to-us car (used 2005 Toyota Sienna) that we bought just five months earlier.
When I asked the mechanic if the leak needed to be fixed right away or if we could wait, he looked at me and said, “Well, if you want to breathe in carbon monoxide and kill brain cells, go right ahead and wait.”
Fair enough. Fix it.
The grand total? $350! Talk about an unforeseen expense.
Without a car repair fund OR an emergency fund, that repair naturally went on the credit card. Now, we do use a GAP store credit card for our groceries, eating out, and gas every month in order to supplement our clothing budget (we get $500 a year or more in free clothes). We pay the balance in full at the end of every month.
This repair, however, put us behind. We were still paying the statement balance every month (not just the minimum payment) and avoiding interest, but getting back to being able to pay the balance in full took months.
But shouldn’t we pay off debt first?
Our refund just happened to be a little more than the balance on our no interest credit card we used for our moving expenses. Some would ask, “If your goal is to be debt free, then shouldn’t you use your refund to pay off that credit card?”
The short answer is no.
An emergency fund gives you the buffer you need to not go further into debt when life happens because it inevitably does. If you are on a debt pay-off journey, this fund prevents going into further debt. It gives you the peace of mind you need to put anything left in your budget each month towards your debt.
Dave Ramsey in his book Total Money Makeover puts an emergency fund as his number one baby step to financial freedom. If you are starting to pay off debt, you need an emergency fund FIRST. The starting number he suggests is $1,000.
We used an existing account with Capital One 360 for our emergency fund, and we allocated $1,000 as Ramsey suggests. Should we need to tap into that account for a true emergency, we would reallocate any debt repayment money each month to building it back up to $1,000 before returning to tackling the debt.
Why an online bank like Capital One 360? We want our emergency fund to be accessible, but not too accessible. You don’t want to be dipping into it unless it is a true emergency. Capital One 360 also offers better interest than many brick and mortar bank checking accounts.
2) Sinking Funds
If you’ve never heard this term, a sinking fund is like a savings account, but for fixed yearly (or biannual) expenses.
Dave Ramsey’s blog puts it this way: “With a sinking fund, you save a small amount each month for a certain amount of time before you make your purchase. You determine how much you save by taking the total amount to be spent and dividing it by the number of months you have left until you must pay” (source).
While typically, sinking funds accumulate the total amount needed by contributing monthly, our budget just doesn’t allow for that right now. We wanted to save for Christmas, our biannual car and rental insurance payment, and a car repair fund.
If we were to take that monthly amount out of our budget each month, we would need to cut our regular expenses further and deal with the hassle of three more budget categories each month.
Tracking the categories we have is hassle enough. When you’re juggling home management plus homeschooling, you need to simplify everything you can.
So we decided to use our tax refund to fill each fund in one fell swoop.
First, we created separate accounts with Capital One 360 for each sinking fund. Next, we determined the annual amount needed for each fund. Once we received our refund, we transferred that amount to each account.
What a relief to know that Christmas, unforeseen car repairs and regular maintenance, plus our insurance payments are covered! I don’t need to worry about it at all.
3)Purchase Homeschool Curriculum
This is technically another sinking fund, but I already knew what I wanted to purchase for the year.
We only needed to make three major purchases for our homeschool: the Life of Fred elementary math series, Magic School Bus Yearly Science Experiment Subscription, and the Brave Writer centerpiece “The Writer’s Jungle”.
We do spend a small monthly amount on homeschool supplies, but they likely look very similar to any family’s discretionary spending: books, paper, and art supplies.
4) Debt Repayment
We have two debts that we want to eliminate over the next few years.
First, as I mentioned earlier, we applied for a no interest (for 21 months) credit card for moving expenses. My husband quit his job at the end of November because we knew that finding a job in North Carolina from Boston would be nearly impossible.
He was attempting to reenter engineering, his original field; therefore, his search was broad and yielded multiple interviews with unanticipated time tables. The total we would have spent on flights, car rentals, and hotels would have likely exceeded the amount we lost by moving early.
We moved in with my parents in Maryland so he could commute for job interviews. We had no idea how long the job search process would take, and we had very little savings at the time. While he did have some freelance work, we opted to open a Citi Simplicity card so we would not accrue interest on our regular credit card.
I also still have student loans totaling around $24,000.
The remainder of our tax refund went towards the no interest credit card. Once that is paid off, we will move on to putting extra payments toward the student loans using the debt snowball method.
Your tax refund can either be used to fund a fun experience or long-felt want, OR it can be used to set you on the path to financial peace. I hope your taxes turn out the way ours did, and you have a sizeable refund to allocate in this way. Happy filing!
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