If you are anticipating an income tax refund, you may be dreaming about how you could spend it – a vacation, new clothes, or kitchen upgrades. Although it would be fun to spend that cheque on frivolous items, take some time to consider your financial situation before going on a shopping spree. Are there more beneficial uses for that cash? Here are some ways to make tax refund spending work for you:
Tax Free Savings Account (TFSA)
A TFSA is a general purpose account that lets you save its earnings without needing to pay tax on those earnings. Because you are not penalized for withdrawing funds from the account, it is a great place to save for a down payment or car, or anything that requires shorter-term savings. What’s more, you can now contribute up to $10,000 per year.
Registered Retirement Savings Plan (RRSP)
Adding money to your RRSP has two main benefits: increases your retirement savings and reduces the amount of income tax payable for the year in which you made the contribution. This plan is intended for long-term investing such as GICs, mutual funds, and bonds; you will be taxed fully when you withdraw funds.
Registered Education Savings Plan (RESP)
Saving for your own future is a great idea; saving for your child’s education is also a worthy goal. Add some money to your child’s RESP; not only do the funds in this post-secondary education account grow tax-free, but you could also qualify for the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB). The CESG offers 20 cents for each dollar you contribute up to a maximum of $500. The CLB helps lower-income families in particular save for their child’s education.
When an emergency strikes that requires money, what do you do? Put the expense on a credit card or charge it to a line of credit that may not get paid on time and in full? Instead of owing for the emergency and the possibility of accruing interest, start or add to an emergency fund in a savings account that you can access easily. While making small, regular deposits is a surefire way of building such a fund, using some of your tax refund can get it to a significant level.
If you decide against investing your refund, consider tax refund spending in the form of debt repayment. You can attack high interest credit cards, payday loans, student loans, or car loans until they are gone, and gradually roll those former payments towards other debts until they no longer exist. Then you can roll those former payments towards retirement savings and your emergency fund.
Sometimes, tax refund spending is necessary, but take a look at where that spending needs to be. Is it time to repair your car or fix your roof? Spending on needs is a valid form of expenditure as long as they are truly needs, not wants masquerading as needs.
…and Some Wants
Depending on the size of your refund and your financial planning, you may find you do have enough for a little fun. But keep it little – for example, enjoy a nice dinner out but forego the fancy vacation. Fun doesn’t have to require a lot of money.
While it is tempting to enjoy some lavish spending, give your refund a purpose. Instead of letting it vanish into thin air, use your tax refund spending to increase savings, eliminate debt, and make overall positive changes. The more you save now, the more you will have in the future.