Nearly half of Canadians will receive an income tax refund. While it is tempting to treat your tax refund as ‘free money,’ a cheque from the CRA can often go a long way in doing something financially meaningful. Before letting your tax refund burn a hole in your pocket, remind yourself that the government isn’t giving you money, but rather returning money that should have been yours all along.
Here are 7 fiscally responsible ways to allocate your tax refund:
- Boost your nest egg: Start or add to your emergency fund to ensure you can cover unexpected expenses. The rule of thumb is to reserve about three to six months’ worth of expenses in an easily accessible interest-bearing account.
- Pay down debt: With interest rates on the rise, there may be no better time than now to retire debt. Focus on eliminating high-interest rate liabilities first such as credit card debt.
- Invest in your kids: Contributing to a RESP can go a long way in helping to cover the cost of your kid’s education. The government matches 20% of your RESP contributions and will give a grant of up to $500 per year.
- Invest in yourself: Use your tax refund to boost your savings by contributing to a RRSP or TFSA. Investing in a TFSA will generate tax-free growth and contributing to a RRSP will help to generate a larger tax refund.
- Step closer to home ownership: Add to funds for a down payment or make a lump sum payment towards your mortgage. A principal residence is a good way to grow assets tax free.
- Help Others: Do good and save tax at the same time! You will receive a tax credit, depending on your province and income level, for every dollar you donate to a registered charity.
- Spend It On Something You Need: Sometimes you need to take care of the essentials first. A tax refund is a good way to cover the cost of those unexpected expenses, like a leaky roof or much needed dental work.
No matter what the size of the refund, we often feel as if it is “found money.” Don’t get caught treating your refund cheque any differently than you’d treat your weekly or monthly paycheque. Give the money a purpose, put it to work, and improve your financial situation.
Cattelan Private Wealth Counsel
HollisWealth®, a division of iA Securities Inc.