How to spend your tax refund responsibily
We’ve all been there before: you realize you’re getting back a huge tax refund, and the first thing you do is start thinking about is that new expensive toy you could buy with the money (hellllo iPad 3!), or a holiday somewhere warm. The possibilities are endless!
While a new gadget or a shopping spree might seem like great ways to spend your hard-earned money, getting a lump sum back from the government is the perfect opportunity to achieve or start a financial goal you’ve been putting off.
Here are some ideas:
1. Pay off credit card debt
Maybe the last thing you want to do with your refund is do something boring like pay down your consumer debt. But since most credit cards charge around 20% on outstanding balances, can you afford to waste money on something that gives you nothing in return?
Putting a significant amount towards your high interest debt will help you sleep easier at night, and get the ball rolling to help you get rid of the rest of your debt.
2. Save for retirement
Most of us aren’t saving enough for retirement. So your tax refund provides a golden opportunity to save more than you normally would. The best part is, by investing a lump sum into your RRSP and continuing your monthly contributions, you will get a bigger tax refund next year.
3. Start an emergency fund
It’s hard for a lot of people to get started when it comes to setting up an emergency fund. But the truth is, if you don’t have a 3 to 6 month cushion, you can’t afford not to start saving. When you are faced with an emergency, life is so much easier when you have a little money tucked away to help you get through hard times.
4. Make an extra mortgage payment
Just by making one extra payment towards the principal amount of your mortgage, you could reduce the interest paid over the life of your mortgage by thousands of dollars.
5. Invest in your home
If you have been putting off a home improvement project, your tax return is an excellent opportunity to finally get the job done. Not only will you improve your quality of your life by making improvements to your household, but you will probably also be increasing the value of your home.
6. Get your car serviced
Take the opportunity to use your tax refund to buy new tires, get an oil change, or repair whatever else your car needs to keep running properly. Putting money into your car now, means you will potentially avoid bigger, costlier problems down the road. Note that putting money into your car does not mean spending money on tinted windows, heated seats, or a new sound system. :)
7. Improve yourself
If there is a cooking class you’ve always wanted to take, a conference you’ve been dying to attend, or second language software you’ve always wanted to buy – this could be the perfect opportunity to take the plunge and invest the money into improving yourself. If you’re a former bookkeeper who’s been at home with the kids for a few years but you want to start working from home, invest some time and money in becoming fluent in a cloud accounting software system, for example.
8. Invest in your health
Do you have dental work you’ve been putting off? Could you use a few sessions with a chiropractor or a massage therapist? Have you always wanted to get in shape with a personal trainer? Using your refund to invest in your body and your health is priceless and can have a major impact on your life.
Two years ago, I spent my tax refund on LASIK eye surgery. Being extremely active, I found my eyesight was holding me back from the things that I loved to do. So after much thought, I decided to do something about it, and it ended up being one of the best decisions I’ve ever made. My quality of life has improved so much since that day.
I’m not getting back a tax refund this year (in fact, I’ll owe taxes), but every year I would get back a tax refund, I’d try to use the 90/10 rule – where 90% of my money went to something responsible – like paying down my debt or saving for retirement. And the left-over 10% I’d spend on something fun for myself. For example, if you’re getting back a $1,100 refund, you would earmark $990 towards debt or savings, leaving you with $110 to spend on whatever you want. :) I like this rule because you’re allowing yourself a treat, while still being wise with the majority of your tax refund.
What do you plan on doing with your tax refund?
Author: Krystal Yee
I’m a personal finance blogger and marketing professional based in Vancouver. I’m a former Toronto Star (Moneyville) columnist, author of The Beginner’s Guide to Saving and Investing, and co-founder of the Canadian Personal Finance Conference. When I’m not working, you can usually find me running, climbing, playing field hockey, or plotting my next adventure.