If you overpaid your taxes over the year and/or qualify for certain tax credits, you’ll get a tax refund. This is money back from the Government of Canada at some point in May or June — assuming you file your taxes on time. Considering that the average tax refund last tax season was $1,895, if you’re in line to get some money back this year, you might already be thinking about what to do with your tax refund. Keep reading for suggestions you may not have considered.
What is the smartest thing to do with tax refunds? If you have any outstanding debts, it’s always a great idea to pay them down by targeting the principal. Look at high interest debts such as credit card debts or personal loans. Pay a huge chunk off one of these and you’re going to save money on interest every month moving forward. If you’re not sure which debt to target first, a Licensed Insolvency Trustee can help you prioritize.
If you’re doing okay managing your debt with what you bring in every month, this is your chance to invest in your future. Depending on your stage in life, this could mean opening a Tax-Free Savings Account (TFSA) to save up for something you want to buy, like a flat screen TV. Or maybe you want to finance a down payment on a home or an income tax deductible Registered Retirement Savings Plan (RRSP), the latter of which could help you get a refund next year. Both a TFSA and an RRSP allow Canadians who are 18 years and older save and invest tax-free.
An option we like is to commit 85% of your refund to saving for something long term and sensible, and the remainder to something for yourself, like a new guitar or a pair of running shoes or dinner at a great restaurant. This makes it easier to visualize what you’re saving for and can help you stay on track.
This is like an investment in your short-term future.
Why pre-pay your bills? You can use the money that would normally go to these expenses for something else. It might all go right into savings. Or maybe most of it will, but some of it will go to treating yourself with a little something to stay motivated. Either way, being caught up on your bills will feel great and you’ll be a step closer to meeting your financial goals.
Playing the market may seem like a game for people with spare cash, but $1,000 (or even less) is all you really need to start your first investment portfolio. Stocks, bonds and funds are all investments with different levels of risk and reward, and you can be as conservative as you want., and you can be as conservative as you want.
One way to have some fun investing is to reserve some of the money you invest to either put into something you’re passionate about. Read about a start-up with a great idea? See what it would take to acquire 0.01% of the company. If the company you invest in eventually sells for $50 million, your little share will be not so little anymore.
If you’re risk averse, you could invest in businesses that issue monthly dividends — a portion of the profits (determined by how much of the company you own) that you can reinvest or use to pay down your debt.
And if you’re really risk-averse, you can still make some good money with investing. Try a Canadian Guaranteed Investment Certificate (GIC). They’re partially insured by the Canadian Government to give you a low-risk way to grow your money.
This is an excellent answer to the question of what to do with tax refund money. And it’s important because the washing machine will break at the worst time, leaving you with repair costs and flood damage in your laundry room. And if that happens, you’ll thank yourself for tucking some money away.
Start your emergency fund with the goal of putting away enough to cover three months of living expenses. Your tax refund is a nice start, and if you budget to add a little bit more each month, that initial investment will start building interest. With time, you’ll have enough to handle the broken washer, and maybe a dryer as well. broken washer, and maybe a dryer as well.
This is the ultimate investment in yourself, especially if it brings you closer to your dream career, a better salary and a life you can only imagine now.
Alternatively, you might invest in your kids’ future with a Registered Education Savings Plan (RESP) where the government matches your contributions up to just over $7K a year. This is one way to build an education fund for your children and protect the money until they’re old enough to put it towards their own dreams.
While building an emergency fund can prepare you for unexpected costs, insurance can help reduce how much you need to pay out of pocket during some of those unthinkable events. Protect your kids with a personal life insurance policy, decrease potential hospital bills with health insurance and even consider bumping up the liability coverage on your home in case of accidents.
When combined with emergency savings, insurance is an investment in your future wellbeing.
We’ve made a few suggestions in this direction already, but it bears repeating. You may think you have to be responsible at the expense of treating yourself, but it doesn’t have to be either/or.
Using the majority of your tax refund for something prudent while putting a bit aside for something special makes both feel better. And if you’re going to spend money to feel good, make sure you spend it on something great. For example, don’t just go for a burger, go get the best burger you can find, like these ones in Montreal, Toronto or Vancouver.
You can do this in two ways. The first is to put it towards your mortgage principal. While it’s better to pay off high interest debts before your mortgage, owning more of your home is always smart.
The other way to invest in your home is by spending on renovations or repairs. Remove a wall to open your kitchen up for a modern look, or finally get around to re-shingling the roof. These projects not only improve your everyday life but could also increase the resale value of your home.
It’s the ultimate feel-good way to use any extra money you find. Giving even a portion of the money to a charity that means a lot to you can feel more rewarding than using it on yourself. You’ll know for sure that your money is helping people who really need it, and if you give $200 or more to a registered charity, you’ll even get a tax credit allowing you to save money on next year’s taxes as well.
Anything that makes you feel good about how you used it! This is your tax return, so whether that means using your refund to pay off debt, allowing it to grow through investment or securing your future, you have plenty of ways to make it happen.
Whatever you spend it on, make sure it feels right for your needs. For further advice on paying off your debts, contact BDO Debt Solutions today.