Don’t just blow it on ‘stuff’ — use your tax refund to get ahead. Five ways to make the most of it
You’ve just checked you Canada Revenue Agency “My Account” and learned that the tax refund you’d been expecting is finally winging its way into your bank account.
Great news — particularly during these economically perilous times.
Aside from the massive feeling of relief, your annual tax refund is a great opportunity to boost your financial goals and allows you to focus on the most important priorities for your money.
Here are five clever ways to put your tax windfall to good use.
Clear that high-interest debt
A $10,000 credit card balance at an interest rate of 23 per cent (sadly, this is a standard rate today), will cost you about $189 a month in interest charges alone. It’s no wonder you’re frustrated when your $250 monthly payment barely scratches the surface of the balance owing.
Layer on a personal loan or a line of credit payment and there’s precious little left each month.
A tax refund can be your golden ticket to clearing those nasty credit card balances that have been growing due to their exorbitant interest rates. Or, at least you can try to put a sizable dent in the balance as a kick-start to paying it off completely.
This may also lead to you to being able to qualify for a consolidation loan to corral all your high-interest debt into a lower-interest, lower monthly payment.
It’s time to launch that emergency fund
An emergency fund gives you a cushion should a financial crisis occur, such as losing your job or needing to pay for an unexpected bill like a large car repair.
Consider using your tax refund to build up this cash reserve in a high-interest savings account. Ideally, the fund will eventually grow to between three- and six-months’ worth of essential living expenses.
As a long-time financial educator, I’m often asked if building an emergency fund takes precedence over paying down credit cards or vice-versa. My advice is that you need a minimum of about $2,000 (whatever your insurance deductible is for your home and car combined) in the emergency fund, then quickly focus on your credit card balances.
Once those are clear, focus again on your emergency savings. Whatever you do, don’t go into debt while paying off your current debt. The available room on your credit cards is a de facto back up worst-case-scenario emergency reserve of cash.
Invest in your future — or theirs
Could your retirement savings use a boost?
The great thing about putting your tax refund into an RRSP or TFSA is that both accounts offer tax advantages that will bring benefits to you for years to come.
Yes, the markets are all over the place right now due to the unrelenting Trump tariff threats, but investing for the long-term is how retirement savings grow through the power of compounding.
Stay close to your financial adviser, be consistent with your strategy and contributions, and know that market dips eventually end.
FHSA, RESP or a big-ticket ‘investment’
Perhaps your goals are more specific, like saving a down payment for a home.
If that’s you, the First Home Savings Account (FHSA) is a fantastic place to invest your tax refund.
Contributions are tax-deductible, similar to an RRSP. Withdrawals (including investment growth) are tax-free if used to buy a qualifying first home, like a TFSA.
And you can contribute up to $8,000 a year, with a lifetime limit of $40,000. Hopefully you’ll keep contributing regularly on pay day (don’t exceed the limit!), and next year if another tax refund comes your way, you can pop that into the FHSA, too.
Registered Education Savings Plans (RESPs) are for a child’s future education costs.
Money contributed to these plans also benefits from the Canada Education Savings Grant (CESG). The government matches 20 per cent on the first $2,500 contributed annually to an RESP, to a maximum of $500 per beneficiary per year and a lifetime maximum per beneficiary of $7,200, up to age 18.
Big-ticket “investments” are not stocks, bonds or funds. They are often investments in yourself, like taking a course that gets you to the next job level, renovating space in your home to improve your quality of life or productivity (and hopefully boost the property value), buying equipment for a profitable side hustle or even a tool or two to serve your needs, such as growing a vegetable garden.
Before throwing your tax refund at a big-ticket investment, do the math. The goal is to derive as much value as possible from it so it won’t feel like wasted money.
Invest in something fun, and good, for your well-being
Spending on your well-being is often overlooked in the monthly budgeting process, and commonly shamed.
Research, however, shows it helps support healthy financial habits like saving and debt reduction, while lowering financial anxiety.
Consider allocating a small portion of your tax refund, say 10 or 15 per cent, toward something fun and good for you.
It could be something as simple as an upgrade to your “look” with new glasses or a new bike to launch a spring fitness regimen. Or, more elaborate, a vacation to your favourite Canadian destination, now that you’re boycotting travel to the U.S.
The goal here is to enjoy at least some of your tax refund windfall while tackling your other financial goals.
This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.
