Six Smart Ways to Use Your Tax Refund
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Published on
April 4, 2024
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Having some extra cash back in hand is always a welcomed part of tax season! But like any type of financial payout, the challenge is knowing how to balance fun with sensibility when deciding what to do with it.
It all starts with having a financial plan and understanding your own personal needs and goals, for both the short-and long-term. Part of that means paying down any debt, spending and investing wisely, and making good choices for your financial future.
Here are six considerations you can make this tax season if you receive a refund:
1. Pay off your credit cards
A credit card balance often comes with high interest rates, making it one of the worst kinds of debt. By using your tax refund to pay off your credit card debt, you’ll avoid paying more in the long run while getting your debts on track. It’s a great first step toward financial freedom.
2. Prepay the mortgage
If you own a home, consider making a prepayment against the mortgage. Prepayments can help to reduce the interest paid over the duration of the mortgage and tackle your loan sooner than planned. Be sure to review your mortgage contract to ensure that making extra payments won’t lead to penalties!
3. Load up the Tax-Free Savings Account (TFSA)
A TFSA can be a valuable tool for multipurpose saving goals. These goals could include mortgage prepayments, home renovations, travel, or building up your emergency fund. To start making progress, consider allocating a portion of your tax refund to a TFSA. The best part? Any interest earned within the account is tax free.
4. Reinvest in your RRSP
By contributing part of your tax refund to your RRSP, you could receive another tax refund next year. In other words, your contribution reduces your taxable income, which increases the likelihood of receiving a refund next year, which you can then reinvest in your RRSP when you receive it, and so on. A tax refund to create another tax refund, that sounds like good planning!
5. Renovate
Investing a portion of your tax refund into your home can increase its value and build equity. However, it's crucial to choose the right projects to maximize the return on your investment. Seek advice from a real estate professional, a contractor, or an interior designer, who can help you make the right decisions.
h increases the likelihood of receiving a refund next year, which you can then reinvest in your RRSP when you receive it, and so on. A tax refund to create another tax refund, that sounds like good planning!
6. Treat yourself
Like financial planning, life is all about balance. You shouldn’t forget about enjoying it and spending on the things that make you happy. While you should exercise a little restraint and take care of your financial obligations first, spending a little on yourself can be a smart choice for your tax refund.
Consider allocating a portion of your refund toward things like:
- Planning a vacation
- Investing in further education
- Purchasing a gift or experience
- Planning and budgeting for a well-deserved vacation
After all, what’s the point of saving toward your goals if you can’t enjoy them?
Statera Financial Planners can help you make the right choices for your tax return, start preparing today!