How to use your tax refund wisely


You got a tax refund? Here are five ways to use it wisely

According to the Canada Revenue Agency, more than half of all Canadians got a tax refund last year, with the average amount being $1,765. Rationally we all know a refund is really just the repayment of our own hard earned money that we overpaid to the government but still, we often think of it as free money to spend. And while that big screen TV or weekend getaway may be tempting, there are smarter ways to utilize your tax refund. Here are five ways that make good financial sense.

  1. Pay Down Debt: With credit-card interest rates typically set around 20 per cent, my number one piece of advice is pretty straightforward. If you have a card balance, pay down what you owe on your card, as soon as your refund arrives. If your credit cards are paid off, take a look at any lines of credit. With interest rates on the rise, using your tax refund to reduce the balance owing makes a lot of sense.
  1. Take a look at your Mortgage: The Bank of Canada has stated that almost half of mortgages will renew this year, very likely at a higher rate than when the loan was set up or last renewed. To reduce the impact of higher rates, consider paying down your mortgage balance with your tax refund. Most mortgages allow you to pay down modest amounts with no penalty.
  1. Build up your emergency fund: Your TFSA makes an excellent emergency fund. You can take money out at any time, tax-free and you won’t lose contribution room. There are some important rules regarding when you can contribute it back, so be sure to speak to your financial advisor before you do.
  1. Education Savings: You just got money from the government. Why not get some more? Putting money into an RESP for your children or grandchildren can generate an additional 20% grant on up to $2,500. And if you’ve not maximized in the past, you can put in up to $5,000. That will result in $1,000 from the government.
  1. Home Improvement: Are there any home upgrades that you’ve been putting off? Focus on those that can save you money. Replacing drafty windows can not only cut your utility bills but they can return up to 89% when you sell.

If you set out a plan for your refund, you’re more likely to use it wisely. Consider having your refund automatically deposited in your bank account, or transfer the money in advance to pay down your credit card. Start to think about your refund as forced savings as opposed to found money. It may not be as much fun in the short-term, but it will pay off in the long run.

Mark Shimkovitz is a financial advisor with Raymond James Ltd. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The view and opinions contained in the article are those of the author, not Raymond James Ltd. Raymond James Ltd. member of Canadian Investor Protection Fund.