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Doing your tax return might feel like a chore, but if you're expecting a tax refund instead of a tax bill this year, then you're likely looking forward to what you can do with that extra money. While it's tempting to think about putting it all towards a splurge like buying that new bike you've had your eye on, you might want to consider doing something more practical first.
So, what can you do to make the most of your tax refund? Here are a few things to consider:
Expenses can come up unexpectantly- you might be facing reduced hours at work or your car might need new brakes next month. An emergency fund helps you navigate life's financial ups and downs more easily. If something unexpected happens, you'll have what you need to take care of yourself and to reduce your stress in situations that are already challenging. Experts recommend that you have enough in your emergency fund for between three to six months of expenses.
Got a big financial expense coming up? Maybe you are planning some home improvements later in the year or maybe you want to stash some cash to help with increased living expenses at another time in the year like during the holidays.
Savings accounts are great places to put money that you don't need right away, but intend on using in the near future since you'll be able to easily access your money and still be earning interest on it.
You might even decide to put it temporarily in a Tax-Free Saving Account (TFSA), which could allow you to potentially earn a slightly higher interest rate while you wait to use the money. Make sure you check your yearly TFSA contribution limits.
First Home Savings Account (FHSA) could be a great savings vehicle for your homebuying goals. This registered plan gives eligible future first-time homeowners in Canada a way to contribute a maximum lifetime contribution of $40,000 in the account toward their home purchase. Currently, individuals with an FHSA can contribute up to $8,000 annually. If you overcontribute to your account, there are tax consequences.
Got debt? Whether it's in the form of auto loans, credit card debt, or personal loans – using your tax refund to pay off high-interest debt is a smart move.
Debt repayment can be a long journey and it is easy to get discouraged. Being able to make a big dent in the money you owe by putting the lump sum of your tax return towards it won't just help you get out of debt faster, it might also renew your dedication to repaying it and inspire you to make additional payments to pay off the last of your debt.
To get the most from your tax refund, make sure to put it towards your debt with the highest interest rate – which will reduce how much you're paying in interest every month. Look at your credit cards, lines of credit or auto loans. Once those kinds of debt are repaid, you can focus on lower interest-rate debt like student loans.
Whether you're 21 or 51, you should be thinking about saving for retirement and making sure you contribute on a regular basis. If you're young, getting a head start will mean that the money you set aside now will have more time to accumulate and grow through compound interest. A small tax return invested today could be a big boost to your retirement later on.
If you're older, you’ll benefit from contributing to your retirement savings – especially if you're behind. Putting your tax refund towards your retirement savings is an easy way to catch up without having to scrimp and save.
The best part? If you put the money in your Registered Retirement Savings Plan (RRSP), you will get a tax deduction, subject to certain limitations, for your contribution, which could result in a tax refund next year as well … that you can also put towards your retirement fund. It creates a great cycle of savings!
Make sure to check your RRSP contribution limit by logging into your Canada Revenue Service account.
If you have kids, one of your main savings goals is probably funding their post-secondary education to help them attend without going into significant amounts of debt. By putting away some money from your tax return today, you'll be able to help them follow their dreams in the future.
One benefit of putting money into a Registered Educational Savings Plan (RESP) is that the government will help you by matching part of your contribution. The government deposits a Canada Educations Savings Grant of 20% on the first $2,500 (or less) of your contributions per child each year to your plan. That is up to $500 per child each year! If you missed out on contributing in other years, you can make extra contributions, up to prescribed limits, this year to take advantage of the grant.
Subject to limitations on contributions, money also grows tax-free in your RESP meaning that you'll be able to save more since it won't be taxed while it grows.
Want to pay off your mortgage sooner? Using your tax refund to make an extra mortgage payment can reduce the amount of time it will take you to pay off your mortgage and decrease the total interest you pay over the life of your loan.
That can work out to significant savings if you do this every year. It could also ease your stress if you're getting close to retirement and want to be mortgage-free or if you just hate the idea of paying a mortgage every month.
Maybe you're diligently saving for your retirement and are on track, but you have other life goals that you could use this money to make come true.
For example, maybe you eventually want to quit your job and start your own business. Or maybe you want to build a swimming pool or go on a big trip in the next few years.
Think of the tax refund as a way to live your life to the fullest and follow your dreams. Put the money aside for that fun future plan.
You can choose to do any of the things above with your tax refund, or you might choose a combination of some or all of the above depending on how much money you're getting back and what your financial priorities are.
Whatever you choose, make sure to also give yourself a small treat with the money – whether it's a take-out dinner from your favourite place or a new outfit or something else you enjoy. After all, you earned the refund.
