6 Suggestions on How You Could Spend Your Tax Refund Wisely in 2021
Another tax season is about to hit the books – it’s time to gather those receipts, fill out the forms, and talk to your accountant as you’re likely in store for a payout; the average Canadian is entitled a refund, according to the Canada Revenue with the average refund for last year’s income tax totalling $1,580. Before you splurge and take a five-star cruise in the Carribean, however, let’s take at a look at the benefits of saving your tax refund and putting it to better use.
Here are our top tips for spending that tax refund:
1. Stop Treating It Like Found Money
Although most Canadians are happy to receive a tax refund, there’s very little reason for celebration – you’re actually giving Canada Revenue Agency an interest-free loan. “Many Canadians think of a tax refund as a bonus, even though it’s your own money to begin with,” says Cynthia Caskey, vice president, sales manager & portfolio manager at TD Wealth Private Investment Advice.
Instead of treating your tax refund like found money, it’s important to spend it prudently. “It can be tempting to splurge on luxury items, but many Canadians need to balance paying debt, saving for a child’s education, and for retirement,” says Caskey. “It’s important to consider these needs when deciding how best to spend your refund.”
2. Pay off any outstanding bills
If you have outstanding bills, using your tax refund to pay them off is probably the best option for you. There’s nothing worse than the stress of being behind. Take this opportunity to get ahead of the game for once.
3. Pay down your credit card debt
Credit card debt can build quickly, but it’s hard to whittle down once it mounts. If you have outstanding debt on your credit cards – debt that keeps you up at night – the responsible thing to do would be to put your tax return towards that debt. Of all the debt you have, credit card debt is most likely to have the highest interest rate running from 9 – 23 per cent. By paying that debt down first, you’ll actually be saving money in interest later.
4. Put some of it towards your mortgage
You can’t beat the guaranteed rate of return of paying down your mortgage. Think of it as the government helping you pay toward your mortgage by letting you use pre-tax dollars as a reward for saving for your retirement. If you have a mortgage that allows you to make additional payments without penalty (and most mortgages will allow you to make an annual lump sum paymentof 5 – 25 per cent of the mortgage value), this might be the perfect opportunity to use that to your advantage.
5. Invest in your future
If you haven’t started an RRSP, maybe it’s time. Your return might not amount to much now, but over the years your investment will grow. This is a particularly good idea if you are feeling no other financial pressures at the moment. A tax return can also be the perfect way to launch an RESP for your child.
6. Amp Up Your Savings
Doesn’t it sometimes seem like bad things happen either when you’re least prepared or when you’re least able to cope? You just paid a huge vet bill and your washing machine suddenly dies. You finally paid off your credit card debt and your car breaks down. These situations happen all the time, and sometimes it feels like you’ll never get ahead. Without an emergency fund, situations like these can be stressful. Why not take this extra cash and set it aside for those little emergencies? When the time comes – and it will – you’ll be glad you did.