We’re right in the swing of tax season, and I’m sure many of you who are expecting a hefty refund have already submitted your taxes there’s likely a bunch of us there who owe money and are holding off to the last possible second. If you are still holding out, you still have a bit of time. The deadline for Canadians to have their personal taxes filed is April 30th. I know when I was still a student and had all those education credits in my pocket I was getting things sent in as soon as my T4 arrived in my mailbox. Those were the days!
Or were they…
Getting a big refund might feel like the best thing ever, but it’s really not. What it actually means is that you have provided the government with an interest-free loan for the past year, and are just now getting your hard earned dollars back. On the other hand, if you actually owe money it means that interest-free loan came your way and the government was lending you money. I know it can be a tough pill to swallow to owe a chunk at tax time, but it helps a little to think of it this way. The best thing you can do is attempt to level out your taxes, so you come out neutral every year…easier said than done though.
If you are in a position where you are getting a refund, then consider what to do with that money. Because it can often feel like found money, you might be tempted to splurge on something you couldn’t normally afford or take a hot vacation to escape the endless winter. However, your tax refund isn’t actually the windfall you might think, it’s actually money you should have received over the past 12 months as earned income. Say you’re getting $900 back from the government, that’s not life-changing money, but it sure could go a long way in refreshing your wardrobe. What that actually means, though, is that your income should have been $75 higher each month. Doesn’t sound like such a big deal anymore right?
How would you have allotted that money into your monthly budget? That really depends on what your primary objectives are, but here are a few suggestions that might not be the most fun but would make the most financial sense.
Pay Down Debt
This is always the top priority for when you have excess cash available. High-interest debt (like credit cards) are a killer when it comes to your finances, and you always want to get rid of them as soon as you can. Putting a lump sum on your most expensive debt will decrease the amount of interest you spend over time and free up additional money in your budget down the road. Eliminating those high-interest debts first is your best bet, but you’re all caught up on that front you can also use your refund to make a lump sum deposit against your mortgage.
Top-Up your Emergency Fund
Next, on the list would be ensuring you don’t go back into debt when the unexpected happens, and the best way to do that is to have a fully funded emergency fund. You want this to be readily available so keep it out of the market and just in a high-interest savings account. An emergency fund will keep you on track if you get in a car accident (those deductibles though!), your furnace breaks down, or your dog needs surgery.
Save for Retirement
There’s never a bad time to increase your savings rate so why not add your tax refund to your RRSP. This has the added benefit of putting you in a better position when you retire but will also help you get another tax return next year. We all know that the earlier you start saving for retirement, the better off you’ll be because of the wonder that is compounding interest, so take advantage of time and put that money to work. Instead of an RRSP, you can also invest in your TFSA, if you’re unsure of which option would be best for you right now then check out this post on that very subject.
Invest in Yourself
One thing that people don’t always think of is spending money on something to improve yourself. And no…I don’t mean go and get yourself some plastic surgery! Depending on what your career path is, getting more education is often a sure way to getting a raise. Is there a course you need to take or a conference you could attend to get you to the next level in your job? Increasing your income is one of the biggest factors when it comes to your finances, so having to outlay money at the start is can quickly pay itself off and then some. Pro tip, make sure your boss thinks your plan is as brilliant as you do. The last thing you want is to spend all the money and not get the raise!
I’m all about balance, so if you have yourself all set up in each of the above categories, then I don’t see anything wrong with spoiling yourself. There’s no fun in always saving your money for a rainy day, but you do need to make sure that you’ve already got an umbrella stored away 😉 Let’s make a deal though and not blow your entire refund on something silly, how about half? Doing something smart with a portion of that money will make you feel better about spending the balance on something more entertaining. Maybe you already have a big purchase that you are saving for (new car, kitchen renovation?), this money could get you closer to that goal.
So tell me, have you done your taxes already this year or are you still procrastinating like me? And if you got a refund, what are you going to spend it on?