The proper thing to do with your tax refund, or any chunk of cash
Have you filed your taxes yet? A quick reminder that taxes are due at the end of April, and if you haven’t had a chance to submit your taxes, it’s a good time to start thinking about it! Check out our article with some tax tips here.
One of the good things that comes out of tax season for many people is receiving a tax refund. A tax refund happens when you end up paying more taxes than you owe over the year. This can happen several ways. For example, you could have made an RRSP contribution which counts as a deduction. You might have spent money on education which qualifies you for tuition credits. Or, you may have made charitable donations. There are many other ways to lower your payable income taxes, so be sure to talk with an accountant to make sure you’re getting all of yours!
Now, if you were lucky enough to get some money back after filing your taxes, the question now becomes “what should I do with my tax refund?” For that, we have some ideas that can help you.
1. Pay down your high interest debts
Holding on to high interest debts can be very costly. It’s a matter of opportunity cost: if you are holding debt which costs more than what you can earn by investing, it makes more sense to pay down the debt first. One of the biggest culprits of high interest rates is credit cards. Take a closer look at your credit card information and notice the interest rate. You’ll be quite unpleasantly surprised to know that most credit cards these days have an annual interest rate of around 18%, if not higher! That’s why if you’re carrying any credit card debt, your first choice should be to pay those off.
There are a variety of ways to bring down your tax bill even further. You might make an RRSP contribution, because whatever dollar amount you put into your RRSP lowers your taxable income by that exact same amount. This is especially effective if you reinvest the tax refund that was generated from your initial RRSP contribution. You’re making that initial contribution even more effective!
Another option to consider is investing in your TFSA, with the benefit of offers tax-free returns on your savings. This will also allow you more liquid access to your money, perhaps for an emergency fund of sorts… which brings up the next point.
3. Put an emergency fund savings together
How much have you set aside in your emergency fund? Generally speaking, financial experts recommend having an emergency fund that holds around 3 months of living expenses. You might be tapping into the emergency fund in the case where you can’t work, or even worse, get laid off. You’ll be extremely glad you had an emergency fund to see you through this time.
4. Enjoy it!
If you’ve taken the time to put your finances in order, then there isn’t any reason why you shouldn’t get to enjoy yourself. After all, isn’t the whole point of money to make sure we live happily? Spend a bit of your money on something that makes you and your family happy and enjoy life!
As always, Flexfi is happy to provide some tips and advice. However, we always want to suggest that you speak with a reputable financial professional who can look at your individual situation and tailor a plan to suit your needs.