What Should You Do With Your Tax Refund?
If you’re like most Canadians, when you file your taxes and get a tax refund, you probably do your happy dance. While it can be tempting to use your tax refund for a night out on the town, to truly get the most out of it, it helps to plan ahead. Here are some of the best ways to maximize your use of your tax refund.
In This Article:
Top 11 Ways to Use Your Tax Refund
1. Pay Your Outstanding Bills
Are you behind on any other bills? Whether it’s your cellphone bill or your cable bill, there’s nothing worse than the feeling of owing someone money. Not only can it lead to late fees and penalties, it may even negatively impact your credit score (any late or unpaid cellphone bills will show up on your credit report).
If you’re a homeowner, you tend to have a lot more bills than a renter. And if it’s a utility bill you’re behind on, you’ll want to get it paid off right away. The last thing you want is for your power or heat to be turned off during the coldest time of year. Take this opportunity to get your bills paid up to date, so you’re no longer stressing about them.
2. Pay Off High-Interest Debt
Credit card debt can add up quickly, especially during the holidays. Before you know it, a few hundred dollars of credit card debt can turn into a few thousand dollars. Getting in debt is the easy part. Getting out, however, is the hard part. Some credit cards make it so easy for less responsible spenders to get in debt and, as you’re only required to make the minimum payment each month, which is quite affordable, it can end up costing you a boatload of interest in the long term.
If you have any debt with a double-digit interest rate, paying it down as soon as possible is a no brainer. Most credit card interest rates start at 18% and some retail credit cards can go as high as almost 30%. By making a lump sum payment on your credit card and getting it partially paid off or even paying in full, you can save a ton of interest and take this payment off your monthly calculations.
3. Pay Off Your Mortgage
Most mortgages allow you to make extra payments on an annual basis. Usually you can make lump sum payments of between 10% and 20% of your original mortgage amount each year. Some lenders are more restrictive and only let you make lump sum payments once a year on your mortgage anniversary date, while others let you make lump-sum payments throughout the year.
If you don’t have any high-interest debt and your mortgage is your only debt, putting some or all of your tax refund towards your mortgage can be a good way to save yourself a lot of interest over the long run and reach mortgage freedom that much sooner. If you’re someone who’s risk-averse, paying down your mortgage can both be emotionally satisfying and save you money.
4. Get a Head Start on a Short-Term or Long-Term Savings Goal
If you’re anything like me, you have short-term and long-term savings goals. Short-term savings goals are any goals you’d like to accomplish in the next five years, while long-term savings goals are any goals you’d like to make happen beyond the next five years. Examples of short-term savings goals include saving towards a family vacation, saving up for a new vehicle, and saving the down payment for a home. Meanwhile, examples of long-term savings goals include saving up for retirement and paying off your mortgage. If you don’t have any savings goals, now is the perfect time to come up with them as they can help shape your spending and budget allocations.
Once you have your savings goals figured out, you’ll want to prioritize them. Most of us don’t have an unlimited amount of money to accomplish everything. By prioritizing our goals, we can better allocate funds if we ever find ourselves with any spare money (ahem, like from a tax refund).
5. Save Towards Retirement
Retirement may be an abstract concept and seem like it’s a long ways away for some, but it will be here sooner than you think. If you’re one of the lucky few with a gold-plated pension plan at work, then you probably don’t have to worry about retirement savings, but for everyone else it’s important to make saving for retirement a priority. If you were hoping to rely solely on government benefits, I hate to break it to you, but in most cases that simply won’t be enough. You’ll need to put away money for retirement in addition to that.
When it comes to saving for retirement, the best way for most Canadians is through the Registered Retirement Savings Plan (or RRSP for short). The RRSP is a tax-sheltered account that lets your money grow tax free until retirement. By contributing to your RRSP, not only will you get a head start on saving for your golden years, you’ll also receive a tax refund from the government. Pretty neat, eh?
6. Save Towards Your Child’s Education
If you have your retirement savings under control and you don’t have any high-interest debt, the next thing you might consider is saving towards your child’s education. College and university aren’t as affordable as they once were. Students these days are taking on a lot of debt to attend post-secondary education with the hopes of landing a good job upon graduation. If you’d like to lend a helping hand, contributing to your child’s Registered Education Savings Plan (RESP) is a great way to do so.
The government created the RESP to encourage parents to save towards their children’s education. When you contribute to your child’s RESP, your child will receive a 20% government top-up. That’s essentially free money. By contributing $2,500 per year to your child’s RESP, your child will be eligible for the full $500 government grant.
Coming up with $2,500 all at once can be tough, so why not use some or all of your tax refund to help provide a brighter future for your child?
7. Add to Your Emergency Fund
There are many instances where you feel like you can’t catch a break. The roof on your home starts to leak, the car needs repairs, and your pet needs emergency surgery. Unless you have savings to pay for all of these events, you’ll have to go into debt to pay for them. This can cause a lot of financial and emotional stress.
All of this could have simply been avoided by saving an emergency fund ahead of time.
Financial experts recommend having three to six months’ living expenses set aside in an emergency fund; but saving that much money can take a long time for the average Canadian. By using your tax refund, you can help boost your emergency savings so you’ll be ready the next time your car has a flat tire or an ice storm damages your home’s roof.
8. Make Home Renos
Are there some home renovations that you’ve been holding off on doing because you simply don’t have the money? Some home renovations are purely for leisure; for example, installing a swimming pool in the backyard. While others are preventative; for example, replacing the shingles on your roof before water gets inside your home and does serious damage. When you own a home it seems like there’s a never ending list of home renovations and improvements. Unless you’re handy around the home, you’ll need to hire someone to do them for you, which doesn’t come cheap.
Why not use some of that tax refund money to pay for renovations your home is in dire need of? By spending this money now you can prevent serious damage to your home later on, which will ultimately save you a lot of dough.
9. Donate to Charity
If all of your financial needs are taken care of—you don’t have any high-interest debt, you have emergency savings, and you’ve contributed to your child’s RESP—why not put your tax refund to good use and donate some or all of it to charity? It’s important to recognize that not everyone is as fortunate as you. A lot of the things we take for granted—a roof over our head, food on the table, and clothes on our backs—some families don’t have. By taking some of your tax refund money to give to a charity with a cause that you care about, it can be a rewarding way to give back.
Check out Globe and Mail’s list of the top 100 non-profit organizations, which will all greatly appreciate a donation. Similar to your RRSP, charitable donations are also tax-deductible, so there’s the bonus of a greater refund the following year.
10. Upgrade Your Skills to Help Boost Your Income
Do you ever feel like you’re in a dead-end job? Why not do something about it? By taking some or all of your tax refund and going back to school to upgrade your skills, it can go a long way to improving your employment prospects in the coming years. You could use your tax refund to upgrade your skills at your current job or to go back to school for a completely new career; the choice is yours. There are a plethora of courses, certifications, and degrees for you to revisit or take on, and your tax refund could help you get started.
11. Treat Yourself to Something Nice
While I wouldn’t recommend spending your entire tax refund on lavish gifts each year, there’s no harm in using some of your tax refund as a pat on the back for a job well done. Treating yourself can be anything from a dinner out to clothing from your favorite retailer. As long as it keeps you motivated, it can be well worth it. However, make sure you’ve properly budgeted and looked over all your expenses to prevent yourself from spending money you might not actually be able to afford.
Whether you’ll be renovating your house, preparing for retirement, or whichever other purpose you see fit for your tax refund, if you’re properly planning, you can enjoy this well-deserved lump sum. It’s important to note that these tips aren’t mutually exclusive. There’s nothing stopping you from doing more than one of these.