6 ways to use your income tax refund
Good news! As soon as you know you're expecting a tax refund, you can start daydreaming about what to do with it: a new electric bike, a Caribbean yoga retreat, home makeover... there’s no shortage of ideas. However, this can also be a good opportunity to start adopting sound financial habits and better manage your money. Let’s get you started. You'll see that we're not short of ideas either!
1. Pay off your debts
Are your credit cards maxed out? Then consider paying off your balance. By using your tax return to pay your debts, you:
- Avoid paying high monthly interest on your credit card balance
- Pay off what you owe faster
- Can put that money towards a new project
It’s a great way to alleviate any budgetary burden at the end of the month, while also reducing your financial stress.
2. Pay off your mortgage
Did you know that lenders allow you to repay up to 15% of the original loan amount each year? You could use your tax refund for this. This allows you to:
- reduce the amount of your mortgage loan
- pay your mortgage off faster
Think about it! By contributing to your RRSPs, you can use your tax refund to pay off your loan.
3. Max out your RRSP contributions
Put your tax refund in a registered retirement savings plan, especially if you have unused contribution room. This will allow you to:
- reduce your taxable income
- pay less income tax
- watch your investments grow, tax sheltered
- be entitled to higher benefits (e.g. Canada Child Tax Benefit)
Planning for the future today is a win-win strategy. Get a head start on your savings goals by investing early in the year.
4. Set up an emergency fund
A personal emergency fund is a cash reserve you use to pay for unexpected expenses. As its name suggests, this money is for emergencies only. And since no one can peer into the future, it's always a good idea to plan ahead. The goal here is to be able to:
- know you have money available when you need it
- pay off an amount without having to borrow or pay interest on it
A leaky roof, a damaged vehicle, a new heating system... these are examples of when it’s good to have an emergency fund. It's never too late to set up an emergency fund. Open an account and start depositing every month. Over time, you’ll be surprised at how much you can put away—it pays to be disciplined.
5. Open a TFSA
Whether you want a kitchen renovation, a luxury vacation or a jet ski, you’re going to need money!
A Tax-Free Savings Account (TFSA) is an interesting option because it allows you to:
- withdraw money without having to pay income tax on it, regardless of why you’re withdrawing it
- access your cash anytime you need it
The sooner you start putting money in a TFSA, the sooner you'll go from dream to reality. A word to the wise: keep withdrawals to a minimum, otherwise what's the point?
6. Open an RESP
When your children grow up, they may want to be an astronaut or a veterinarian. And even though they still have plenty of time to think about it, you can start saving up for their post-secondary education early.
The sooner you open a Registered Education Savings Plan (RESP), the more profitable it becomes. In fact, you’ll:
- receive a government grant of at least 30% based on the amount contributed
- see your money accrue and grow tax-free
Do you have grandchildren, nieces or nephews? You can invest in their future too. Your tax refund is a great way to get started.
If you’re still on the fence about what to do with your tax refund, then reread this article because you'll see that it's better to invest it wisely. You'll be glad you did in any of the 6 options proposed. By reinvesting your money, you'll be able to avoid financial stress, plan for unplanned expenses and even save for one of your dream purchases. Convinced?
