By Julie Jaggernath
Does getting an income tax refund feel like a windfall?
No matter if your refund is only several hundred dollars, or as much as several thousand dollars – plan how best to use the money to pay debt or add to your savings, before it leaks out of your bank account and you’ve got nothing to show for your hard earned cash.
Paying down your mortgage, credit cards or other debts or setting money aside for savings are great options for an income tax refund. The right solution will depend on your overall financial situation.
Here are some things to consider as you plan ahead:
Start an Emergency Savings Account
Life happens, and working on building a savings account with 3 months of living expenses on hand will help you deal with the unexpected. With a Tax Free Savings Account (TFSA) you can grow your savings without paying any tax on the interest you earn.
When an emergency arises and you don’t have the cash available to pay for it, most people reach for their credit card or write a cheque on their line of credit. This pattern of spend and pay for it later keeps them in debt because there’s always an unexpected expense.
The only way to not end up in debt is to have money set aside for spending when you least expect to need it.
Pay Down Credit Card Debt
It’s often been said that the problem isn’t the credit card; it’s how we use it. There’s a lot of truth to this statement because some people do use credit cards and never pay interest or fees. Paying $1,000 off on an existing credit card balance with a 19% annual interest rate will save you close to $200 a year.
Boost Retirement Savings & Make Budgeting Easier
Contributing as much as you can to an RRSP is always a good idea, especially if you tend to owe money when you file your taxes. Go one step further and balance your RRSP contributions with reduced payroll deductions. This will free up a bit of money in your budget each month to use for other expenses or investments.
Depositing funds into a Registered Education Savings Plan (RESP) will help fund your child’s post-secondary education and qualify you to receive a Canada Education Savings Grant. The plan will earn tax-free investment income based on the money you contribute and the money received from the education grant.
Saving for Home Improvements
Look around your home. What projects would you like to tackle in the coming year or two? The cost of home improvements increases if you need to rely on a line of credit to pay for the work. Set a goal to save at least a portion of the costs ahead of time.
Get Value from Your Income Tax Refund
These are just a few ideas to help you get great value from your tax refund. It’s easy to lose sight of the fact that an income tax refund isn’t free money from the government.
The bottom line is that you work hard for your money and your money should work every bit as hard for you.
Related articles: Use a Balanced Approach to Pay Off Debt & Invest in RRSPs