Most of us never expect to get much of a refund, or maybe you are one of the lucky ones who can count on getting one each year. Either way, few people have a plan to use their tax refund to their greatest advantage. And I don’t mean celebrating with a few adult beverages! Here are my Top 5 ways to use your tax refund wisely this year.
1. Contribute Your Tax Refund To Your RRSP
This will benefit you again next tax season! This contribution will bring your gross income down and, possibly, mean you’ll have another refund next year.
Plus you are contributing to your future retirement savings. This tip for using your tax refund is likely the hardest because you’re delaying the gratification of using your money. And, I find people want to spend before saving!
This is part of the “Pay Yourself First” rule. If taxes are normally taken off your income first, why not personal savings?
Most of us already have an auto debit into an RRSP account (if you don’t, I highly recommend it!) If you’re already contributing into your RRSP regularly and don’t want to top up, then you can look at other ways to use your tax refund.
2. Contribute To Your Savings or TFSA
You never know the importance of an emergency fund until you need it! Maximize your savings contributions for the year by putting all or a portion of your tax refund into a TFSA savings account.
And, if you don’t need the emergency savings, then that money can be put towards a great vacation or home project!
3. Pay Off Your Debt
If you’re carrying a high credit card balance or multiple balances, use your refund to clear up any outstanding debts you have.
Which debt should you tackle first? There’s a simple 5-step process for figuring out how to prioritize your debts.
- List all your debts,
- Write down the balances, interest rates, and minimum payment beside each debt,
- Organize by highest interest rate first,
- Make your budget,
- Start paying down the highest interest rate balance first
Using your tax refund to pay down your debt will help your overall financial picture and save on high interest costs.
4. Add a Prepayment to Your Mortgage
Rates, rates, rates. There is a lot going on in the world of rates right now. The best way to get ahead of them when it comes to your mortgage is to make a prepayment.
This amount, above and beyond your current payment, goes straight to the principal of your mortgage. This will help reduce the amortization period and save you on interest costs.
Even a small lump sum can save you hundreds in interest!
5. Use Your Tax Refund Towards a Downpayment
Have you been saving for the down payment on a new home? Your tax refund could put you in a great position to buy your home!
There are two strategies we could look at: withdrawing from a savings account or using an RRSP loan for your down payment.
Either option does require some guidance, especially with tracking where your down payment funds came from. So, make sure you’re working with a mortgage expert, like myself, to make this work for you.
So, what are you going to do with your tax refund?