When a windfall hit your bank account – like those stimulus checks or this tax refund – it can be tempting to spend it all right away on what comes to mind, or use it to jump on the next crazy investment trend. (GameStop stocks and microinvestments, I’m looking at you.)

But here’s the truth: trending investment tactics and unplanned expenses are not going to help you build serious wealth for your future. Take microinvestment for example – it’s basically the same thing as investing your change, and you can’t rely on it for long-term investments. To really build wealth and make your money work for you, it is important to have a plan for the extra money that gets in your way.

Instead of focusing on the short term, now is a good time to think about the bigger picture. What are your long term financial goals? What’s your why when it comes to spending and saving money? You might want to buy a home, start a business, put money in a college fund, or leave a legacy for your children and grandchildren. If you use it consciously and stay focused, any unexpected flat rate can get you closer to your goal.

So before you spontaneously spend or invest that money, here are some tips on how to use it to win over the long term.

1. Make yourself clear about your current money situation

The first part to getting the most out of this money is to evaluate your financial situation. Make sure your four walls are covered (that is, your groceries, utilities, shelter, and transportation – in that order). If you are struggling to make ends meet in any of these areas, your extra money should go towards this in the first place.

If you’re all good at these areas, think about it according to a step-by-step plan. I’m part of the team at Ramsey Solutions where we have a simple plan called 7 Baby Steps that has helped millions of people take control of their money, get rid of debt and build wealth. No matter where you are on your financial journey, you will fall into one of the seven steps, so take some time to figure out which applies to you. I’ll break them down for you in the next section and you can visit RamseySolutions.com for the full overview.

When you know where you are now, it will be easier to figure out how to get the most out of your tax refund and stimulus check. Now let’s take a closer look at the Baby Steps.

2. Bring order to your finance house

Once you determine which Baby Step you’re on, you can use your extra money to get organized and get from one Baby Step to the next. So I would recommend using your extra money based on where you are in the Baby Steps:

Baby step 1

If you haven’t started Baby Steps yet or are currently on Baby Step 1, use your stimulus check and / or tax refund to build a $ 1,000 starter emergency fund. I know this may not sound like much for an emergency fund, but the purpose of this is just to give you a buffer for any unexpected expenses that arise during the debt settlement.

If you have qualified for a stimulus check this year, you already have enough money for it and can move on to the next step.

Baby step 2

Now is the time to use the debt snowball to settle all of your debts (except your house). That means you’ll want to use your tax refund and business check to fuel your debt snowball and get some of those loans paid off.

If you’ve never heard of the debt snowball method of paying off debt, here’s a quick rundown:

List your debts from smallest to largest (regardless of the interest rate). Pay for everything but the smallest, minimum payments.

Pay off the smallest debt asap. Once that debt is gone, take that payment (and any extra money you have) and apply it to the second smallest debt while continuing to make minimum payments for the rest.

Once this debt is gone takes his payment and applies it to the next smallest debt. The more you pay off, the more your released money grows and is thrown on the next debt – like a snowball rolling downhill.

Here’s an important tip: establishing and sticking to a zero-based budget each month will help you ensure that every single dollar of your income (including any extra money you get from the government) is being used properly. This can make a huge difference in how quickly you will be able to save and pay off debt.

Baby step 3

If you are already debt free, your tax refund and economic check can help build your fully funded emergency fund. This should be enough to cover three to six months of the basic living expenses you would need if you lost your job or had some other major life event.

But how do you know if you need three months of spending, six months, or somewhere in between? Well, if you are young, single and have a stable income, or a family with two incomes, then three months should be enough. If you’re a family with an income – or if you’re self-employed, paid on commission, or have a chronic illness in your family – spending six months is ideal.

In addition to your extra tax season money, you can build this fund by selling things around your home that you no longer need, taking on another part-time or outside job, removing certain items from your budget, and anything else you like can help lower your expenses so you can save more.

Baby step 3b

Baby Step 3b saves a 10 to 20% deposit on a house. This is an “extra” baby step that some people take at different times depending on where they are in life. Some people jump straight from Baby Step 3 to 4 when they are out of debt but not ready to buy a home.

If you decide to take this step now, your tax refund or stimulus check would be a great addition to your home fund! I recommend saving a down payment of 20% or more if possible, as this will avoid what is known as private mortgage insurance (PMI), which increases your monthly mortgage payment.

Baby step 4

Baby Step 4 is to invest 15% of your income in a 401 (k) or IRA, so go ahead and use your extra money to top up your retirement savings. Note: This does not mean microinvestment. This is fine for short-term savings, but remember, it is risky to rely on for long-term investments. I would recommend putting the money from your tax refund and stimulus check into a Roth IRA (which means you will be taxed on the money you invest, but your investments can grow tax-free, so in the long run you actually can save more). Thanks to compound interest, even a small amount of money like a tax refund can grow into a pretty large pile of money over time.

Beyond Baby Step 4, you’ll save for your children’s college funds (Baby Step 5), pay off your house early (Baby Step 6), and build and donate wealth (Baby Step 7) – so your tax refund and stimulus check can go on each of these goals should be aligned. The best part about reaching the final baby step is all of your hard work has paid off and you can live and give like no other. Just think how your annual tax refund alone could help someone in need!

3. Stop lending money to the government

If you’ve had a big tax refund this year, it’s a good idea to adjust your tax withholding so you can keep more of your hard-earned cash throughout the year. A large refund feels like a bonus when you receive it, but in reality it’s like borrowing your money to the government – with no interest. You may even want to find a tax professional to help you understand your taxes.

* * *

Wherever you are in your financial journey right now, focus on your goals and be careful how you use any extra money that comes in. Your hard work will really pay off in the long run.

This plan works, all of you – I made a lot of mistakes with money during my college years, but I pulled myself out of my rock bottom by drawing up budgets, paying off debts, and following the Baby Steps. And I know if I can, so can you.

This article originally appeared in the July / August 2021 issue of SUCCESS magazine.

Anthony ONeal is a Ramsey personality and the best-selling national author of The Graduate Survival Guide: 5 Mistakes You Cannot Afford In College. Anthony travels the country teaching people how to build true wealth and get rid of debt.


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