What should I do with my tax refund?
Did you get a tax refund when you filed your taxes this year? Here are 8 ways to make the most of your new-found money.
Every tax season, millions of Canadians get money back from the government in the form of a tax refund. If you’re one of them, congrats! This is an opportunity for you take a big step towards your financial goals and set good habits for the rest of the year.
Why am I getting a tax refund?
If you paid more in taxes during the year than you were supposed to, you’ll get a tax refund. And if you haven’t paid enough, you’ll owe taxes instead. While this may seem like a drag, it just means that you had extra money in your pocket over the course of the year.
You may get money back for things like Registered Retirement Savings Plan (RRSP) contributions, donating money to charity, paying tuition – along with a load of other items that provide a tax deduction or tax credit.
Filing our taxes is essentially a way for the government to check if you’re paying the right amount in taxes each year.
What should I do with my refund?
Unfortunately, there’s no easy answer for that. Because we’re all in unique financial situations with a variety of factors that impact us, there are plenty of approaches that could work well for you. The best ones for you to take will likely depend on your current circumstances, as well as your short-term and long-term goals.
Here are some ideas that we think are worth considering. You can pick one, or mix-and-match between them to fit your specific goals.
1. Pay down debt
When you take on debt, you’re essentially borrowing from yourself in the future. High-interest debt like credit card balances and payday loans can lead you to pay more for things than they cost, making it tough for you to get out of debt and build your savings.
Using your tax refund to pay down debt can be one of the best things you can do for your financial health.
2. Start an emergency fund
When unexpected expenses arise, or you face a tough financial situation – being prepared is key. An emergency fund gives you the peace of mind knowing that you’re protected if something unexpected comes up.
The rule of thumb is to have between 3 to 6 months of living expenses saved up. This covers anything from losing your job to paying for large home or car repairs and makes tough situations a bit less stressful to deal with. But saving up 3 to 6 months of expenses can be a lot – so start small. Setting aside part of your tax refund is a great way to be ready in case of emergency.
3. Save for a down payment (or pay down your mortgage)
Thinking of buying your own home? Saving your tax refund for a down payment can help you afford a property that you couldn’t afford before. It can also help you take on a smaller mortgage in the future.
And if you’re already a homeowner, using your tax refund to make a lump-sum payment is a great opportunity to get ahead of the curve and pay less interest in the long run. If you choose to take this approach, we recommend that you check with your mortgage provider first to see if this is something you’re able to do.
4. Start saving for your retirement
It’s never too early to start, and there’s no better time than today to start saving for tomorrow. If you don’t have an RRSP right now, consider using your tax refund to start one. The money you contribute to an RRSP can also be used to reduce the taxes you pay in the following year.
If you’ve already started saving for retirement – nice work! Consider this as a good chance to beef up your savings.
5. Start (or add to) a Tax-Free Savings Account (TFSA)
Money you put in a TFSA can be used for large purchases in the future or for retirement. Any earnings in a TFSA will grow tax-free, and you won’t have to pay tax on them when you take out money from the account in the future.
If you take out money from a TFSA, you can also add back the amount you withdrew in a future year – making it a flexible savings tool. Just be careful to stay within your TFSA contribution limits!
6. Invest your money
Investing can make your money work for you. Depending on your risk tolerance and comfort level – there’s many different approaches you can take.
If you want to invest your tax refund, we recommend getting in touch with an advisor to determine the right strategy to help you hit your goals.
7. Donate to a cause you believe in
It feels good to give. If you’re feeling generous, you can make the world a better place by donating.
No matter what cause you’re passionate about, even a small donation can change someone’s life. (And selfishly, donating to a registered charity can increase your tax refund next year.)
8. Treat yourself
If your finances are in order and you’ve diligently saved your money all year, why not reward yourself for your hard work? Your tax refund can help you splurge on something you’ve always wanted or to fund a trip you’ve been dreaming of. Our only advice? Keep it reasonable and don’t go overboard! 😊