April showers might bring May flowers, but April’s tax deadline brings something equally exciting to many Canadians – a tax refund. With the average tax refund weighing in at about $1,700, it’s extra hard-earned cash in the pocket that can help you work toward reaching your long-term financial goals. Without a plan, however, your tax cheque can end up falling victim to non-essential expenditures. Did you really need to get the latest Samsung Galaxy or iPhone when you have last year’s version?
Put Your Dollars to Work
Regardless of how you choose to spend your tax refund, having a plan in place is the best way to ensure you make sound decisions you won’t later regret. There are a number of ways to spend your dollars wisely, and it all comes down to your goals and priorities. Need some inspiration? Here are five suggestions to get you started.
Pay down high-interest debt: Make it a priority to pay down high-interest debt any time you land on extra cash in your budget. Credit cards often carry a 20 per cent interest rate, and unless you know of an investment that guarantees a similar return, this is likely the best way to put your money to work.
Save for retirement: For many Canadians, tax refunds are a result of investments in the RRSP, which help reduce taxable income. So, what better way to amplify the savings than to reinvest the returns into the RRSP and receive a return again next year?
Make a charitable donation: It pays to give, and by making a donation to a registered charity, you receive a federal tax credit of 15 per cent on the first $200, with additional credits varying by province. Visit the CRA website for a full breakdown of rates.
Do a home renovation: If you’ve been putting off installing those hardwood floors, now might be the time to do it. Funds from your tax refund (especially when pooled with a partner’s or family member’s) might just provide you with the extra cash flow needed for your home renovation, and can ultimately increase the value of your property.
INFOGRAPHIC: The Renovation Rookie’s Cheat Sheet>
Make a lump-sum mortgage payment: Most banks will allow you to put down an extra 10 – 20 per cent of your mortgage principal on an annual basis to reduce your balance owing. It’s a great way to pay down your mortgage up to several years early, and even an extra thousand dollars annually can make a significant impact. Talk to your bank to learn about prepayment options and get yourself ahead of the home ownership game.
It’s Not All Business
Making sound financial decisions is imperative to your overall long-term financial health, but that doesn’t mean there’s no room for fun. Just like you’d fit fun purchases into your monthly budget (we hope!), it’s perfectly fine to allot a portion of your tax refund to lifestyle expenditures that you value. The key, as usual, is to plan ahead.
Whether it is your debt, your retirement, or your home, identifying your priorities will go a long way in helping you plan your future. This tax season, get a head start on your goals by investing in what matters most to you. Unlike that new cell phone purchase, you likely won’t regret it.