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8 Ways to (Wisely) Spend Your Tax Refund

May 8, 2012
6 mins
A man and a woman walk down the street with shopping bags

Another tax season is in the books - it's time to relax, sit back, and wait for that tax return. And 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 Bahamas, 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%. 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. “The next item on my list if you generated your refund through an RRSP contribution would be to pay toward your mortgage," says Caskey. "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 payment of 5 - 25% of the mortgage value), this might be the perfect opportunity to use that to your advantage. The more you pay now, the less you pay in interest later.  Check out how much money lump sum payments can save you with this Mortgage Calculator.

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. “Consider spending your tax refund to invest for a child’s education – a deposit to an RESP (Registered Education Savings Plan) could be eligible for 20% grant for children up to the age of 18 for contributions up to $2500,” says Caskey. “As the average tax refund in 2011 for Canadians was $1,580, a deposit to an RESP could mean an additional $316 toward a child’s education through a Canada Education Savings Grant (CESG) – a great way to stretch your hard-earned dollars towards a key goal in this low-interest-rate environment!”

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.  If you’re looking to invest your refund, it’s important to consider the rate of return. A lot of investors are more concerned about sheltering their highest-taxed income, but with interest rates as low as they are times have changed. “This common wisdom was arrived at in a much higher interest rate environment for suggesting that interest-bearing investments be held in a tax-sheltered plan,” says Caskey. “With interest rates at generational lows, it is leading to a very small difference in overall returns being sheltered from tax; there may be a more significant opportunity to shelter returns from other investments if they offer higher overall returns

7. Upgrade your job skills

Have you recently found yourself wanting to return to school? Have you dreamt of taking courses to upgrade your skills? Will doing so help increase your salary? If you answered “yes” to any of these questions, you might want to consider using your return to invest in yourself. This is an especially good idea if it will help to boost your income in the long run.

8. Treat yourself to something nice

Sometimes being responsible is all we do. If you’re one of those people who seems to always be doing the right thing – saving money, paying down bills, saying no when you really want to say yes – then maybe you need to do something nice for you. Buy yourself a new outfit. Go get your hair done. Take yourself out for a nice lunch. Go golfing. Spoiling yourself is sometimes the best course of action – especially if it’s something you don’t often do. Alternatively, you could also treat someone else to something nice.  It might not be top on your list of things to do with your tax refund, but using some or all of that extra money to make a charitable donation could be more rewarding than a new pair of shoes.  

With files from Sean Cooper

Sean Cooper

Sean Cooper is the author of the new book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Financial Journalist, Speaker and Money Coach, his articles and blogs have been featured in publications such as The Toronto Star, Globe and Mail, Financial Post, Tangerine: Forward Thinking blog and TheDot. You can follow him on Twitter @SeanCooperWrite.

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