Blow it, spend it, catch it on fire… Is what you’d say if you wanted to stay broke. Fortunately, we all know that those with money will invest first, then spend the rest.
As mentioned in the 50/25/20/5 Guide, depending on how much you will receive, there is an opportunity to chop away a large amount of debt using the “Chop Block”. The average tax refund in 2017 was $2,763.
Let’s show the numbers:
50% : $1381.50 for Essentials + Minimum Debt Payments + Habit(s)
25% : $690.75 for “The Chop Block” (Dedicated to sewing The Broke Investor’s Pockets)
20% : $552.60 for Active/Passive Capital (Enterprise/Retirement)
5% : $138.15 for Generous Contributions (No better way to build character)
Now, you WILL be tempted to go on a broke spending spree. Trust me. Even The Broke Investor was contemplating whether he should go on a boat cruise with his tax return. In my defense, The Broke Investor has never experienced a boat cruise before and a mini-vacation from the day-to-day activities would be extremely beneficial.
Besides, The Broke Investor was doing just fine performing penny scavenger hunts throughout the town. There is, however, a feeling of relief whenever you know that you are no longer 2 paychecks away from bankruptcy. Now, It’s more like 4 paychecks away.
Going back to “The Chop Block”, although the example refund is not what The Broke Investor got back, the refund that did come in was enough to make “The Chop Block” strong enough to chop away the credit card debts.
In doing so, cash flow has increased. Let me explain. Instead of paying X amount of $ each month to creditors, which is a (-) hit to cash flow, the same amount of $ can now be considered (+) to cash flow.
Broke Tip: Cash in your pocket is better than cash out of your pocket.
Split the amount up
With that being said, don’t forget to put your 20% into your Active/Passive account(s) to grow your enterprise and retirement fund. Usually, The Broke Investor splits it down the middle and dedicates 10% to active capital and 10% to passive capital.
Considering the 5% for generous contributions, you can pick a charity, non-profit, or you can even become a patron @Patreon. The Broke Investor is in the process of starting a page there, along with implementing the 5% portion of the 50/25/20/5 Budget.
And of course, the 50% is the golden goose portion. Since this occurs annually and we are still receiving wages/profits, Essentials + Minimum Debt Payments + Habit(s) becomes a grey area. Yes, your income is already handling that portion.
However, this is not an open ticket to go all out with your habits. One habit leads to another and before you know it, you’re back to an empty account. Let’s avoid this broke path and at minimum, set aside a portion of the 50% as an emergency fund.
If you were REALLY interested in securing your financial independence, you can implement Dave Ramsey’s strategy in The Total Money Makeover, by setting aside $1,000 as an emergency fund. In this refund example, that is achievable and you will have $381.50 left over to do as you please.
On the note of S.M.A.R.T Goal #3, The Broke Investor came up short. Why? Great question. Because of feature creep… In short, while building the site, every time a piece of the project was completed, another feature was added to the list of things to do. At the end of the day, the project is 5/8 finished with additional features that were never intending for the initial project.
With that being said, here’s S.M.A.R.T. Goal #4:
Specific: Complete online book exchange platform MVP
Measurable: Readers can login/signup and choose which books to exchange
Achievable: Project is 5/8 complete
Results-focused: To finish S.M.A.R.T. Goal #3
Time-bound: By March 16, 2018, The Broke Investor will publish book exchange MVP