Pattie's Blog: How to spend your tax refund
Published Thursday, April 12, 2012 1:55PM EDT
Last Updated Thursday, June 7, 2012 12:56PM EDT
It's payback time -- the time of year when handing over more than our share of taxes is acknowledged with a refund from the government.
If you are like most Canadian taxpayers, you are likely due a fairly substantial amount. Canada Revenue Agency spokesperson Philippe Brideau was quoted last year as saying that based on the 20.2 million individuals who had filed by May 1, the average refund was $1,506.
While most of us realize that a refund is a sign of overpaying taxes through the year, it sure feels good to have that cheque in your hand or to see the CANADA RIT (for Government of Canada refund of income tax) direct deposit in your bank account.
No matter the size of your return, here are some strategies to put your refund money to good use:
Reduce high interest debt: We know it's not really "found money" but if you weren't missing it through the year, why not use some or all of your refund to tackle debt? To get the biggest bang, it's wise to start with the highest interest rate debt, i.e. store credit cards. Compare the rate of interest you are paying on such debt to what you could potentially earn by investing this refund. If you would likely pay more in interest than what you would earn, it would make sense to reduce that debt.
Make an extra mortgage payment: Consider a lump-sum payment to reduce your mortgage and pay it off sooner. Most mortgages allow for some type of pre-payment option, but terms and conditions of individual mortgages vary.
Use your TFSA to create or top up an emergency fund: Lucky you, a handful of cash just landed in your lap -- but luck works both ways and setting aside the money now could help offset financial trouble in the future. An amount equal to three to six months pay is wise to put away for surprise expenses, such as the loss of your job, an accident or an unexpected home repair. TFSA's or Tax Free Savings Accounts allow you to invest up to $5,000 a year, tax free, in a savings account and withdraw money from the account without penalty. The amount withdrawn is added to TFSA contribution room in the following year.