15 May

A smart way to put your tax refund to work

General

Posted by: Alisa Aragon

Many people have already submitted their tax return prior to the deadline and some have started planning on how they will be using it. In general, it can be a real challenge to spend our money wisely, especially tax refunds, which may seem like free money. With the average Canadian getting a tax refund of approximately $1,400 it is tempting to spend it on something fun. However, every astute financial planner, adviser, broker or financial journalist will tell you that you should not aim at getting a large refund.

By definition, a tax return means you are giving the government an interest-free loan. If you want to get less in a refund, you should reduce the amount of money the government withholds from your pay cheque. To do so, you can increase the number of exemptions you claim. It’s usually smarter to saver the extra money all your long and earn interest for yourself.

While it is very tempting to use your tax refund on things such as a vacation, put a down payment on a new car or a big screen TV, there are many other ways to generate future value and accelerate your progress to financial freedom.

  • Contribute to your RRSP’s. Not only will you make that money tax free, you can use up to $25,000 of your RRSP’s towards a down payment as a first time homebuyer. As long as you put back 1/15 of the funds that you withdraw back every year you will not pay taxes on that money.
  • Start saving for a down payment for an investment property. By choosing the right property, the rental revenue will cover your mortgage payments and your equity will increase month after month.
  • Make a lump sum payment on your mortgage. This is a great opportunity to pay down your mortgage fast by making a lump sum payment. By doing so you will reduce the amount you pay in interest as your payment will go directly towards the outstanding principal. While you mortgage payments will remain the same, you will be closer in paying off your mortgage faster.
  • Invest in your personal or professional development. Take a course or attend a conference that will help advance your career or yourself. YOU will always be your best investment.
  • Do a home renovation. Investing in strategic home improvements it can significantly boost the value of your home, build your net worth and transform your living space into the dream home you have always wanted.
  • Make a charitable contribution. Not only will you be helping a worthy cause, you will lower you tax bill next year.
  • Pay down debt. Pay down some of credit cards or loans in order to relieve some of that financial stress. While putting money in savings is important, high-interest debt can counteract those efforts. By using your refund to lower your debt you can start putting more money in savings.
  • Start a contingency fund. If you don’t have one start a contingency fund or add more money to the one you already have. Realistically, you should have at least 3 months of your pay cheque saved. It can take a while to save but your refund can help you get there. You will be glad to have that money available when the unexpected happens.
  • Start your own business. Have you been thinking of starting your own business? Your refund can help you jumpstart your business. A little extra cash is a great way to get your new venture moving in the right direction. As you generate more income you can claim some small business tax deductions on your next year’s tax return.
  • Don’t forget to treat yourself. Remember to treat yourself when you make smart financial decisions. It will help you develop a positive relationship with money. If you spend all your refunds on debt or savings you will leave yourself feeling hopeless. Use a reasonable amount to treat yourself after you have already allocated the rest of the funds wisely.

Whatever you decide to do with your refund, keep in mind how hard you worked for that money, and make sure it’s working just as hard for you.