It’s that time of the year again — tax time. Some of us dread pulling together the paperwork we’ve gathered from the past year. But as soon as we do, we start wondering whether we’ll get a tax refund. And if we learn we will be getting dollars back, we immediately start planning where to spend them. But note this: that money is not a windfall. The truth is, it’s the return of the money you earned coming back to you. Below are a few tips on ways to wisely spend your refund.
Seven tips for spending your tax refund wisely:
- Pay down debt as fast as you can. Many credit cards are among the highest form of consumer debt, with some interest rates as high as 30% annually.
- Establish an emergency fund to cover expenses for three to six months in case of an unexpected job loss, illness or medical emergency. You may also need home or vehicle repairs.
- Invest in your career. A small investment may pay off in increased earning potential and your marketability. Is there a new skill you could be learning related to your work?
- Contribute to making your home your own. If you have a mortgage, apply your tax refund against it. If you don’t own your own home save your tax refund in an RRSP and use the RRSP Home Buyer’s Plan for a tax-free withdrawal to help with the purchase of your first home.
- Put some dollars towards your retirement plan.
- Do you have children? Take advantage of certain government benefits by using your tax refund to fund an RESP to invest in their education.
- Look after your health. Consider joining a gym, investing in sports or exercise equipment that will keep you active. Why not consider enrolling in other fitness, health, stress management or nutrition activities?
Are you getting too much tax deducted off your paycheque?
If you get a sizeable refund every year you might want to stop giving interest-free money to the government by paying too much tax. Ask your employer to make sure you’re contributing the right amount towards your tax deduction.
Then again, some folks don’t mind giving the government an interest-free loan because getting a lump-sum at the end of the year allows them to save more easily than putting savings aside every month. Does that sound like you? If so, don’t sweat about changing your tax withheld – just make sure you put most of your tax refund to good use.
And now for a fun disclaimer: