Taxes can be a bit of a mystery – some years the government pays us, and sometimes we pay them. Most taxpayers think a tax refund is a bonus or a stroke of luck, but it makes more sense to think of it as an interest-free loan that the taxpayer made to the government. So, when you get the money you loaned from the government back, otherwise known as a tax refund, you’re going to want to make the most out of it.
Before you make that impulsive splurge, consider some of these smart and savvy ways to spend your tax refund this year:
If you’re paying more than 10% interest on outstanding credit card payments, it’s not only hurting your finances but likely weighing heavily on your mind. Those high-interest rates add up quickly if you don’t pay the credit off; they’re aptly known as toxic debt. The longer you neglect these toxic debts, the more of your money they’ll eat up, so it’s prudent to shrink them (or pay them off completely) as quickly as possible.
As a starting point, allocate your tax refund towards paying off your highest interest toxic debts – like your credit card – and work your way towards lower interest debts such as car payments.
Taking strides to pay down debt can take the proverbial weight off your shoulders and help you save you money in the long term by reducing the amount of cash consumed by interest payments.
The funds from your tax refund may be the perfect nudge to take the leap and start a small business that’s been percolating in your mind. With an increasing number of professionals now working remotely, starting a new business out of your spare room seems feasible and legitimate. If you have an idea for a business or a hobby you’re passionate about, why not use your tax refund to help turn it into a profit machine?
With your tax refund, you can buy inventory, build a website, pay for initial marketing services, or even pay for business courses to set you on the right path.
Perhaps you’re debt-free and ready to start investing; allow your money to grow! Investing your tax refund doesn’t mean buying shares in a hot-ticket stock; there are so many ways you can use the money to make your future a little brighter.
- Invest in your mind: You can never go wrong with education. It will often translate to returns tomorrow! Maybe it’s a cooking class, a graphic design workshop or a diploma you started a few years back and never completed. Now is the perfect time to invest in your future self.
- Invest in your financial future: RRSPs or TFSAs are a great way to grow your money without thinking about it. The great thing about these types of accounts is that any money you save is non-taxable. While the compounding interest on either of these types of accounts isn’t astronomical, sheltering your money from taxes is a great feeling.
- Invest in your children: You may be in a position to help your children further their education. Consider investing in your child’s future through a Registered Education Savings Plan (RESP). In fact, as an incentive to invest in an RESP, the Government offers a Canada Education Savings Grant (CEGS), which allows you to receive $500/year for the first $2,500 until your child is 17 years old.
- Invest in a cause: Donate to a charity working towards a cause that you hold close to your heart. Charitable organizations receive the majority of their income from October to December. The spring and summer months are much more challenging for nonprofits to raise funds. Your mid-year donation can significantly impact the organization’s goals, and your donation is tax-deductible on your next tax return.
Rainy day funds are perfect for those moments of uncertainty. Suppose a job loss, medical emergency, or a significant unforeseen cost presents itself. In that case, it can leave you and your family financially vulnerable if you do not have a cushion of savings to fall back on. An emergency fund provides peace of mind by providing the temporary financial relief you may need to weather the storm.
It is best to work towards saving the equivalent of 3-6 months of living expenses (or 3-6 months of income) as your emergency fund.1 If you’re not there yet, consider contributing your tax return to your emergency fund to bring you closer to the recommended amount.
With work from home on the rise, why not put your tax refund towards improving the space where you spend your time! Depending on the type of home improvements you pursue, they may increase the value of your home. Projects to improve the functionality or efficiency of your home – such as replacing old windows and doors or upgrading your furnace – can deliver savings in the long run by cutting down on energy costs. New fixtures can go a long way towards infusing your living space with a unique style and feel, which can also elevate the appeal of your home should you decide to sell in the future.
If you’ve been putting off these minor upgrades, your tax return can provide the funds you need to give your home some TLC.
The bottom line is, don’t treat your tax return like free money. Take the repayment on the loan you gave to the Canadian government and think about making these funds go further for you. And if you have some funds left over after making a smart and savvy move with your tax return, go on and treat yourself. You deserve it.