After filing your returns, it can be extremely tempting to start dreaming about ways to spend your refund. However, your future self (and your bank balance) will thank you for choosing a more financially prudent way of using the money.
Here are seven tips for making the most of your income tax refund:
1 Pay off your debts
If you have high-interest debts, such as a credit card balance, a tax refund is a great opportunity to pay it off. A $1,500 balance could cost you close to $300 per year in interest alone. By paying this off, you could put that money into your retirement savings instead.
2 Build up your emergency fund
A key to successful financial management is having an emergency fund that you contribute to on a regular basis. The fund allows you to pay for any unexpected expenses without going into debt or dipping into your retirement savings. It’s essential if you want to keep your budget and savings goals on track.
If you don’t have an emergency fund or haven’t saved much yet, using your tax refund will be a big step towards building one up and helping you to stick to your budget.
3 Boost your retirement savings
Canadian tax refunds can sometimes be considerably large lump sums and if invested early enough, they can make a big difference to your retirement income. To give you an idea of how much even a one-off investment of a $1,500 tax refund could be worth in retirement, we drew up this chart (based on an annual return of 5% and monthly compounded interest):
Value
$1,500 invested on day one $1,500
Retirement in 10 years $2,471
Retirement in 20 years $4,069
Retirement in 30 years $6,702
By investing your tax refund today, it could be worth four times its current value by the time you retire.
Taking this a step further, let’s look at how much your $1,500 income tax refund would grow if you invested that amount every year until you retire (the same assumptions apply):
Total invested Value including interest
$1,500 invested on day one $1,500 $1,500
Retirement in 10 years $16,500 $21,440
Retirement in 20 years $31,500 $54,281
Retirement in 30 years $46,500 $108,371
As you can see, regularly investing your income tax refund can make a huge difference to your savings by the time you retire. Plus, if you invest in either an RRSP or a TFSA, your savings will grow on a tax-deferred basis or tax-free, respectively.
4 Help fund your children’s education
By investing in an RESP, you can build up savings that will help pay for your kids’ post-secondary education. An RESP is a tax-deferred savings account which the government supplements by way of the Canada Education Savings Grant. You can contribute up to $50,000 per child and receive a grant of up to $7,200. Contributing your tax refund regularly will help you to maximize your kids’ education savings.
5 Use it to kick-start good savings habits
After filing your personal tax return, a great way to jump-start your savings habit is to put the whole tax refund into a new savings account. Many savers are put off by how long it takes to save a meaningful amount, but by saving your entire income tax refund, your savings will start off at a considerable amount. By setting up regular, automated contributions, your savings will grow even faster, without you having to even think about them.
6 Put your tax refund towards a down payment or pay off your mortgage faster
A down payment on a home in Canada is getting increasingly out of reach for many younger potential homeowners. However, if you start saving early, and regularly put your income tax refund into your savings, it will soon grow. Alternatively, if your mortgage lender allows prepayments, using your tax refund to make a lump sum payment on the principal on your mortgage will help you to become mortgage-free much sooner.
7 Insure against the unexpected
Using your income tax refund to insure against life’s unforeseen events can be even more financially prudent than saving the money. Life and critical illness insurance can give you the peace of mind of knowing that, if the worst happens, you and your loved ones are protected.
Insuring yourself and your family against the unexpected is a great investment.
Receiving a tax refund is an excellent opportunity to improve your financial well-being. However, it’s important to choose wisely to get the greatest benefit out of it.
If you’d like to discuss the best ways to invest your tax refund, talk to your IG Consultant. They’ll be able to suggest the best options for your unique circumstances.
