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?
Last Thursday night I geeked out by doing a practice run of my taxes. I don’t have all of my forms yet, but I knew enough to plug in most of the numbers. Turns out, I should be getting back approximately $2,500! Which is a shock to me, because I assumed with all of my freelance work, I would end up having to pay taxes. But, my RRSP contributions and my business expenses helped me out a lot.
Because I consistently contribute to my RRSPs, I’m considering filling out the T1213 form which lets you request permission from the government to have your employer reduce the amount of income tax taken off your pay cheques. If you have childcare expenses, donate to charity, have rental losses, or contribute to your RRSP regularly, you could be eligible to receive more take-home pay on each pay cheque in lieu of a tax refund. That way, you can use all that extra money throughout the year to achieve your financial goals – instead of waiting once a year to get a refund from the interest-free loan you gave to the government!!! I’ve thought about doing this for years, but have never gotten around to it. I know, I’m a bad PF blogger. Has anyone else used this form yet?
Here is what I will be doing with my tax refund:
- $1,000 into Emergency Fund. This will mean that I should hit my 2011 goal of a fully funded EF ($5,000), provided I don’t have to dip into that account for any emergencies. My next goal is to one day have $10,000 in my EF, so going forward, I will contribute $50 bi-weekly until I reach that magical $10k mark.
- $1,000 into Retirement Portfolio. $500 into RRSPs and $500 into TFSA.
- $500 into Travel Fund. This will help me out with upcoming 2011 trips to Toronto/NYC, San Francisco, and tentatively Thailand/Cambodia.
Now, usually I take a little bit of my tax refund to spend on myself. I remember one year I bought a Lululemon hoodie, and last year I spent a bit of it to beef up my work wardrobe (I was just starting a new job). However, because I am on a shopping ban, that’s not going to happen this year. So instead, I earmarked some of the money to go into my Travel Fund, which will be spent on myself anyway in the end – just in a slightly different way.
What are you doing with your tax refund?
Well I finally got around to filing my taxes yesterday, and for the first time ever I filed my taxes myself using the Business Unincorporated version of QuickTax. It was actually a pretty simple procedure, and IMO I was finished my taxes quicker than the person from H&R Block who did them last year. I’m definitely going to be doing my taxes by myself from now on. There’s no point in paying someone to do what I can do myself.
How much was my refund? $1,585. Around what I was expecting. I’m going to earmark a bit of the money to beef up my work wardrobe (won’t spend it until I have a job secured – I really, really need a suit!), but the bulk of it will go back into my Emergency Fund.