3 smartest ways to spend your tax refund.
A tax refund can feel like falling into a pile of free money, but it’s no stroke of luck. Truthfully, when you get money back on your income tax, it’s just your own hard-earned cash being returned to you by the Canada Revenue Agency.
Anytime you receive a lump sum on top of your regular pay cheque, it’s a perfect chance to get ahead financially. We think these are three of the smartest ways to spend unexpected income like a tax refund.
Take down big debts
If you’re carrying a mix of debts, even getting started can be overwhelming. The most efficient way to shrink that debt is to first conquer the ones that are growing the quickest.
Rank your debts according to their interest rates, from highest to lowest. Then, pay off debts with the highest interest rates first.
Paying down debts is actually one of the most common ways Canadians who anticipate a refund plan to use it – 30% say they’ll put it towards debts like credit cards, according to a 2023 survey by H&R Block.
Side bonus: paying down debt is an instant stress reliever. You’ll feel so much better without those financial burdens hanging over your head!
Invest in your future
You never know what the future has in store. But you can be better prepared for unexpected expenses when you stash some money away in an emergency fund.
An emergency fund is an amount of money kept somewhere accessible, such as a savings account or Tax-Free Savings Account (TFSA), that you can pull from to cover anything from a little fender-bender to a period of unemployment. And while the ultimate goal is to have enough saved to cover three-to-six months’ worth of expenses, WAY more than you’ll likely get with your income tax return, this time of year is a great time to top it up or put some money towards it.
Buy smarter
Tax-refund season isn’t all about saving money – it can be a time to check some items off your to-do list too. The key is to spend in ways that’ll pay off in the long run.
For example, maybe this is the right time to upgrade energy-sucking appliances to more efficient models. Or sign up for classes that will take your career to the next level – or in an entirely new direction.
Opening a Registered Education Savings Plan (RESP) is one way to get started if you’re not able to commit to classes right away. It’s also a great option if you want to put a little away for your child’s education. As of January 2024, the government’s Canada Education Savings Grant matches 20% of your contributions up to $2,500 annually, and you can receive up to a $7,200 maximum (visit the Government of Canada for the most up-to-date information).
Another idea is to upgrade your living space. If you own your home, renovations such as retiling the roof, upgrading the plumbing or redoing a room, especially the kitchen or bathroom, can bump up its value. And if you don’t own, improving your living space is still an upgrade you can enjoy everyday (unlike, say, an oversized inflatable unicorn floatie).
And, of course, the savviest tax-season strategy is to contribute some of your refund to your Registered Retirement Savings Plan (RRSP). Not only are you saving for your retirement, but you’ll get a break on your taxes next year too!
P.S. – Don’t forget to treat yo’ self
And last but not least, you deserve something just for you! Afterall, you should always give yourself permission to enjoy a portion of your income, and your tax refund is no different.
The key is to keep it small. How small depends on your circumstances, but once you’ve considered your debts, future expenses and most strategic ways to invest, you’ll be in a better place to gauge what you can reasonably afford while still making sure you’re making moves towards having even more money in the bank next year.
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