Will you be among the lucky ones who will receive a tax refund this year? If so, here are 8 ways to wisely use it.
1. Pay your bills
Do you have any outstanding electricity or cable bills? Take advantage of your tax refund to pay them off. Not only will you improve your credit rating, but you’ll avoid having to pay interest and penalties that can quickly drive up the amount due. That’s because service providers can charge an additional 2 – 3% per month for late payments. The amount due can mushroom before your eyes!
2. Clear your debts
Credit cards, lines of credit, personal loans, car loan… So many debts that often come with a high interest rate. Have you already calculated the real cost of your debts?
Suppose you have a balance of $1,500 on a credit card with an 18% interest rate. If you only pay the minimum amount required, it will take you over six and a half years to clear your debt… after paying $596.66 in interest. For that reason, it really is to your advantage to clear any unpaid balances!
3. Pay down your mortgage
Applying some of your tax refund to your mortgage will impact the entire term and the amortization period. For example, you can pay $1,000 on a $300,000 loan, with a 4% interest rate and a five-year term. It may not seem like much at the time, but an early payment will allow you to shave nearly $200 off during your term. Over the entire amortization period, a single early payment will save you about $1,300.
Use this Mortgage Calculator Tool to see how much an early mortgage payment can save you.
4. Get ahead of the game by investing in an RRSP
It’s not always easy to come up with money to set aside for retirement! Between bill and mortgage payments, groceries to be bought, car payments and everything else, there’s often not much left to put into savings.
If you invest a $1,000 tax refund at a 5% rate of interest, you can (based on your total income) get a tax credit of a few hundred dollars. Here’s the best part: Your $1,000 will grow, even as much as $25,000!
5. Invest in a TFSA
You can invest up to $5,500 per year in a TFSA. Your investment may not be tax deductible, but your withdrawals and interest are not taxable. A TFSA offers a good way to grow your assets and build a nice nest egg that you can use for a project or save for your golden years.
6. Save money for your kids’ education
Investing in a registered education savings plan is, of course, a good way to support your children as they embark on future projects. In addition to growing tax-free, the sums you invest in an RESP entitle you to the Canada Education Savings Grant (CESG), which can provide as much as 20 cents on every dollar you contribute.
7. Build an emergency fund
According to the Canadian Payroll Association, half of working Canadians are living pay cheque to pay cheque, and over one-third admit to feeling overwhelmed by debt. Therefore, if your finances are relatively sound, it really would be to your advantage to set money aside for emergencies: a household appliance gives up the ghost, your car breaks down, major home repairs are required, etc. When such situations occur (and they will), you’ll be glad to have the emergency fund, and you’ll get through with a greater sense of security.
8. Plan a vacation
Who doesn’t love planning a vacation? With a nice tax refund, you’ll have more flexibility for planning a relaxing break, either by travelling to an exciting destination or renting a lovely cottage. Vacation time may sometimes seem far off, but it always comes around eventually… often with expenses we had underestimated. This is a good opportunity to relax without going into debt!
Did you receive a fairly high tax refund? Why not spread out the benefits in a couple of ways, by investing in your financial health and using it to complete a special project! You’ve definitely earned it!