While tax time is never any fun, getting a refund sure is! Many people see this cash as a bonus and use it to treat themselves to something they’ve been wanting. While there’s certainly nothing wrong with being good to yourself, (not going to lie – we’re using ours for a vacation!) you can make your tax refund really work for you. Here are some tips to make your money go a long way:
- Paying down debt
Make a list of your debts whether it’s a mortgage, car loan or credit card balance. Include the interest rates, as well as how much each is costing you monthly, and over the long term. Paying off higher-interest and compound-interest debts, such as credit card debt, should be the priority.
Scotia Bank suggests you start with the snowball and avalanche methods. When you use the snowball approach, you use your money to pay off your smallest debt first. This strategy is helpful for those who need some early wins to gain momentum. If you’re already committed to paying off your debt, consider the avalanche method. This method has you pay off the debt with the highest interest rate first, reducing the overall amount of interest you pay. Whichever method you choose, putting your tax refund toward your debt may not be the most exciting option, but it does make a lot of financial sense.
- Building an emergency fund
It’s important to expect the unexpected, such as a surprise vet bill, car repair or loss of income. An emergency fund can be a key support for when life throws you a curveball, and a much less costly option than relying on credit. While you might keep your emergency fund in some sort of savings account, it’s a good idea to have a separate account to keep your funds for short and long-term savings. - Planning for retirement
It is never too early or too late to put aside money for retirement. This is especially true if you don’t have a pension through your employer. A tax refund can be a great way to put a lump sum aside in a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). You should make the effort to contribute to your retirement fund regularly. That’s because of compound interest, which is the interest on both the principal amount of your savings and the interest paid on it.
The longer your money is invested in a retirement vehicle like a registered retirement savings plan, the more compound growth you will see. Plus, with an RRSP, you’ll receive a tax deduction for your contribution, which could result in a tax refund the following year as well.
There are resources available to help you make informed financial decisions. For example, the Financial Consumer Agency of Canada has unbiased information and tools on topics such as choosing a financial advisor, calculating credit card debt repayment options and setting financial goals. You can learn more at canada.ca/money.
