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Smart ways to use your tax refund

By Vanessa Santilli

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If you get a tax refund, it can be easy to treat it like found money. But before you go out and buy a new television, first determine where your extra cash is best used. Your refund might be more rewarding in the long run if you use it to pay down credit card debt, or to start emergency or retirement savings, or even ease the costs of upcoming expenses. tax-refund-smart-ways

Pay down debt
Laurie Campbell, CEO of Credit Canada Debt Solutions, recommends not thinking of the refund as extra money for you. "Rather, think of it as ‘Blank's' money," says Campbell. "‘Blank' could be a credit card, line of credit or any other debt."

There are several strategies for paying off debts when you get a windfall such as a tax refund. Some people like to spread it around to different bills, but Kathryn Mandelcorn, a certified money coach with Money Coaches Canada, suggests doing the opposite. Focusing on one loan can reduce your interest costs and speed up loan repayment, she explains.

"Work at paying off one and then move on to the next. This will help you see quick results and give you a feeling of accomplishment as you pay off each debt," Mandelcorn says.

The sooner your debt is paid off, the sooner you'll be able to start saving for important life goals, such as your child's education or building a nest egg for retirement.

Start an emergency fund
Another savings goal should be an emergency fund. "Whether it's a job loss, a disability or an ill family member, [an emergency] can have a damaging financial impact if you're not prepared," says Mandelcorn.

Often, you'll hear you need to have three to six months' worth of expenses saved. But even a modest amount is better than nothing at all.

"Start with something -- anything," says Mendelcorn. Your tax refund -- or even what's left of it after paying down debt -- could start the ball rolling.

The biggest advantage of starting an emergency savings account is disciplining yourself to put money aside for the unexpected, says Daniel Turski, a consultant with Investor's Group.

"Younger generations have become too accustomed to lines of credit, debt and spending money they don't have," says Turski. "Setting money aside and saving it for an emergency offers the advantage of relying on resources that are already there rather than having to apply for more credit or ask for a loan."

Invest the tax return
If you're debt-free and your emergency savings is looking healthy, consider investing your tax return in either a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), suggests Mandelcorn.

"Depending on the account you choose, you will defer or save tax on the growth with pre-tax dollars," she says.

RRSP contributions are tax deductible and are primarily used for retirement savings. TSFA contributions are not tax-deductible, but, unlike RRSPs, your contribution and earnings will not be taxed upon withdrawal.

"Take the time to learn about investing," says Chris Mazur, a trustee in bankruptcy and leader of BDO's Financial Recovery Services practice in the Hamilton/Niagara area. "Your money is a valuable asset that is not easily replaced. Interview a few individuals to find the person who shares a similar investment philosophy."

Save for upcoming expenses
One more thing to consider before you book that weekend getaway or buy a new tablet are upcoming expenses, says Mandelcorn.

"Is car insurance due that you have not saved for? Do you have dental work that your plan won't cover?" she says. "Think of these lump sum needs and put money aside for them."

See related: Should you pay debt or invest in RRSP?, Tips for using a credit card to pay taxes


Updated: April 21, 2017