What Will You Do With Your Income Tax Refund?

Spring is a fantastic time of year! The weather gets warmer, summer is on its way, and you get your income tax refund. So, what will you do with your tax refund? Well, you have lots of options. You can spend it, save it, invest it, use it to pay down debt or donate to a favourite charity. The best choice for you will depend on what you want to accomplish and your financial situation.

Options for Your Income Tax Refund

Your income tax refund is usually a result of overpaying your income taxes. Of course, the amount you overpaid is returned to you. But it’s still like receiving a cash windfall when you get an income tax refund.

Whether it’s a little or a lot, it’s nice to have. And it can help you get ahead with your financial goals if you use it wisely. Of course, using your income tax refund wisely will look different for you than it will for others. You can use it for one purpose or divide it between multiple goals.

The best way to figure out what to do with your income tax refund is to look at your finances. Do you have debt you need to pay down? Is there enough money in your emergency account? Are you on track with your retirement and education savings if you have children? Is there something you need to replace or buy to make your life easier? All these considerations will impact what to do with your income tax refund.

Spend it

Possibly one of the most popular options, you can spend your refund in plenty of places. But, on the other hand, you might have been waiting all year for your refund to buy something important to you. So what should you consider before you spend your refund? Here are some things to think about:

• Do I need this item?
• Is the refund only a downpayment, and you’ll need to borrow more to complete the purchase?
• How much will this item cost to maintain and insure?
• Can I get a better benefit by putting my refund elsewhere and saving for the item I want?

You can spend your refund to help you save money later. One way to do this is to take advantage of sales or promotions for things you need regularly. You can stock up on groceries or household items that are on sale. Having items you need on hand that you bought at a reduced price can give your budget some breathing room.

You can also check prices to see if shopping in the off-season will save you money, such as buying winter items you need in spring. Since you have the cash available, you don’t need to be in a rush to purchase anything. Sales often come around and can save you a lot of money.
Another option is to put it towards bill payments. It may sound strange, but you can overpay your bills. Paying extra towards your utilities means paying less in the months going forward.

If you’re not on track with your other financial goals, you could keep a bit of your tax refund for a splurge and put the rest of the money to use elsewhere.

Save it

How’s your emergency fund doing? Do you have enough to cover 3-6 months of living expenses? Even if you don’t need that much in a savings account, having the cash available is still a great feeling if you have an unexpected expense. A car repair, an appliance breakdown, or a vet bill can completely derail your budget.

You probably have recurring expenses too. Recurring costs aren’t unexpected because they happen regularly, but it’s still easy to be caught short when they roll around. Some examples are holiday spending, vacation, summer camp and back-to-school shopping for kids. These expenses can set you back quite a bit and may cause you to go into debt to cover them. Saving your tax refund to cover these expenses will help you manage them as they come up.

Invest it

You can instantly boost your investments by depositing your income tax refund into an investment account. So, if you want to use your tax return for long-term savings, consider putting the money into your Registered Retirement Savings Plan (RRSP), your Tax-Free Savings Account (TFSA), or your Registered Education Savings Plan (RESP) for your children’s post-secondary education.

Depositing your RRSP will accelerate your retirement saving goals. It also reduces taxes and can help generate a larger tax refund next year.

Your TFSA contribution can’t be deducted from your taxable income. But, your TFSA allows your deposits to grow tax-free. You won’t pay income tax on the income or growth you get from your TFSA.

If you have children, you can open an RESP. You can contribute $2,500 per year for each child. Deposits made to your RESP grow tax-free, and the government gives you an additional 20% on deposit amounts up to $2,500. Your income tax refund could help your child or children pay for their post-secondary education.

Pay down debt

Sometimes, the best gift you give yourself is to pay off some debt. When you reduce your debt, you can save money, giving you a huge sense of relief. If you eliminate a payment, that money can go towards something else. In addition, if you reduce your outstanding balance, you’ll pay less interest since interest is calculated on your balance owed.

Two popular strategies for paying down debt are to pay off the one with the highest interest rate first or the debt with the lowest balance. Each option is a great way to use your income tax refund.

Your favourite charity

An income tax refund is money you receive because you overpaid your taxes. If your finances are in order and you want to support a cause near and dear to your heart, you can donate to your favourite charity.

Donations to registered charities qualify for a tax credit. If you decide to donate to a charity, be sure to get a receipt. You can claim the donation as a tax credit for the year you made it.

When Your Income Tax Refund Isn’t Enough

If you have so much debt that your tax refund won’t make a dent, finding a way to eliminate your debt could help you. When your paycheque doesn’t go far enough to cover your living expenses and your debt repayments, your income tax refund may not make a significant difference to your finances.

Trying to manage an unmanageable debt load can be stressful and difficult. Fortunately, you don’t need to struggle alone. At Adamson and Associates, we have a team of experts who will work with you to solve your debt problems. Call us today at 519-310-5646 for a free consultation. Our Licensed Insolvency Trustees will help you eliminate your debt and get back on your feet.