March 10

What To Do With Your Tax Refund

Posted by on March 10, 2014 at 8:00 PM

What To Do With Your Tax Refund

I just completed my tax return last night, and was pleasantly surprised with the amount we are getting back.  We had a lot of tax breaks this year:  tuition, children’s fitness credit, children’s arts credit and charitable donations.  This means we are going to be receiving a fairly large return, score!  I love it when we unexpectedly receive an amount of money (who doesn’t?).  Although I would love to spend every penny on fun stuff like clothes and a new computer, I know that might not be the most responsible use of the money.   I know many people who spend almost everything they receive from the tax return, they purchase trinkets, go on trips, etc.  We generally buy things when we need them, and plan all of our trips years in advance.   So what are the best options on how to use our tax return?

Home payment

I just got my annual mortgage statement from my bank, and I know that I can make an annual payment on my mortgage principle.  Although my tax refund won’t greatly reduce my mortgage, I input the amount into this mortgage calculator, it will reduce my amortization by 5 months!  Also, the prepayment will save me about $3000 in interest.  Wow, I had no idea that prepayment was worthwhile and would save as much money as it does.  My current work doesn’t provide an RRSP matching plan, so we have been focused on aggressively paying down our mortgage, and we plan to contribute to our RRSP once our mortgage is paid off.  This would get us there faster!

Reduce debt

Although we don’t have a lot of debt, this would be a prime opportunity to pay down some debt in a lump sum.  Check out Gail Vaz Oxlade’s guide on debt repayment.  High interest debt (usually credit cards) should be the first to be repaid, with others paid off in descending order, based on interest percentage.  Be aware that if you want to pay off something like a car loan, which has a fixed payment over a certain number of months, there may be little benefit to paying it off early.  Analyze your debts, and evaluate how much you owe and to whom, then make a plan (and stick to it).

RRSP payment

I have heard that people use their tax refund to make a lump sum RRSP payment.  This makes sense, especially if a percentage of your tax refund is due to RRSP contributions.  Many money experts advise that this is a great way to build your retirement nest egg, and to not even see your tax refund as money for you to spend, but rather it’s just another contribution to your RRSP.  Honestly, even when we were contributing regularly to our RRSP, we never used our tax refund as an additional RRSP contribution.  We seemed to always have something that needed to be bought or paid off at that time.

Emergency fund

Money experts say that you should have an emergency fund, although they differ on the amount it should be.  Some experts say you should save up to 3 months worth of living expenses, while others, like the wealthy barber, advise we should save two or three thousand dollars in an emergency fund.   My personal belief is that all consumer debts should be paid off before an emergency fund should be started, although this only makes sense if you have access to a line of credit.

Save for the future

We will need a new vehicle in the next 2 years, and in the past we have been fortunate to be able to pay for our cars in cash.  I would like to continue that trend in the future, however, will need to save at least $9,000 for our next car purchase.  That is a daunting amount.  But our tax refund would give us a good head start on that amount.  Another option could be to put that amount into my daughters’ RESP.  If we did that, however, we might not receive the maximum amount available through the government’s RESP contribution program.  According to the CRA website, the Canada Education Savings Grant pays a basic 20% of all contributions for the year, to a maximum of $500 per beneficiary.

Conclusion

We are very fortunate in that we are in fairly decent financial shape.  We are aggressively paying down our mortgage, we have no consumer debt, and we have money in both an RRSP and RESP.   The one area in which our financial house could be improved, is to start an emergency fund.  I like the idea of having a sum of money socked away in case something happens to either one of us, heaven forbid.  I am the main breadwinner in our household, and if I wasn’t able to work, money would be very tight, putting my entire family in jeopardy.   Putting the money into our tax free savings account is definitely the best option for our family.  Before I do that, though, I’m going to buy some new shoes!!   Bargainmoosers, how will you spend your tax refund?

Photo credit: Sharon Drummond

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