What is the Best Thing to do with Your Tax Refund
Q: We’ve filed our income tax returns and for once the government owes us money. We’re getting back about $3,000 and I think we should use the money to pay down our mortgage. My wife thinks we should put it in savings. Who’s right?
A: I wish I could take sides, but truthfully, you’re both right. Paying down your mortgage, other debts or setting money aside for savings are great options for an income tax refund. The right solution will depend on your overall financial situation.
Here are some things to consider as you plan ahead:
Emergency savings – life happens, building a savings account with 3 months of living expenses on hand will help you to deal with the unexpected. With the introduction of the Tax Free Savings Account you can grow your savings without paying any tax on the interest you earn. When an emergency arises and you don’t have the cash available to pay for it, you’ll likely use credit. The only way to not end up in debt is to have the money set aside for spending when you least expect to need it.
Pay down credit card debt – paying $1,000 off on an existing credit card balance with a 19% interest rate will save you close to $200 a year.
Boost retirement savings – contributing as much as you can to an RRSP is always a good idea, especially if you tend to owe money when you file your taxes. Go one step further and balance your RRSP contributions with reduced payroll deductions.
Add to your kids’ education plans – depositing funds into a registered education savings plan (RESP) will help fund your child’s post-secondary education and qualify you to receive a Canada Education Savings Grant. The plan will earn tax-free investment income based on the money you contribute and the money received from the education grant.
Savings for home improvements – look around your home. What projects would you like to tackle in the coming year or two? The cost of home improvements increases if you need to rely on a line of credit to pay for the work.
These are just a few ideas to help you get great value from your refund. It’s easy to lose sight of the fact that an income tax refund isn’t free money from the government. The bottom line is that you work hard for your money and your money should work every bit as hard for you.
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