Your tax refund is what the Canada Revenue Agency gives you back when you make an overpayment on your annual income taxes. About 17.8 million Canadians received a tax refund last year, according to Statistics Canada, with an average refund amount of $2,093.
A tax refund can be a sizeable windfall for your finances, so how do you make the most of it? Below I outline some smart ways to spend your refund.
1. Plan – budget your tax refund
As soon as you file your tax return and have an accurate estimate of your refund amount, you can start thinking about how to use this extra cash. Even if you are not a fan of hard budgeting, you want to have a general idea of your immediate priorities to be sure you are financially covered.
Ask yourself the following questions:
- What debts do I owe? Any high interest debt?
- Am I behind on paying any bills?
- What important purchases have I been putting off – clothes for my kids? Health or dental checkup? Car or appliance repair?
- What expenses do I have coming up over the next few months – birthdays? Vacation? Christmas?
- Do I have an emergency fund setup? Is it fully funded yet?
Of course, I am not suggesting that you can’t splurge on anything fun. Feel free to set aside some portion of your refund for just fun spending money. The point of this exercise is to have you think in advance about how much of your refund is for fun and how much should go to meeting your financial needs.
2. Pay down debt
Yes, I am a licensed insolvency trustee, so naturally, I believe that the lower your debt burden, the better your personal finances will be.
If you have multiple debts, figuring out which debt to pay down first can be daunting. Should you pay off your credit card debt first or put more towards student loans or line of credit debt?
Here is how I would approach it:
- Make a list of every debt you have. Write down the name, the total balance owing, the interest rate, and minimum monthly debt payment.
- Arrange your list by putting the highest interest rate debts at the top and work your way down to the lowest rate.
- Start by paying down the highest interest rate debt first. This will save you a lot of money on interest charges and help you get out of debt faster.
3. Save money by investing in sales
When you have no extra cash, you can only buy the smallest quantity of whatever you need. You can’t buy in bulk because you can’t afford to spend your limited cash. Your tax refund money is a great way to take advantage of sales or bulk purchases at the grocery store.
For example, if chicken is on sale, buy extra, and freeze it (but don’t buy more than you think you will use or can store before it goes bad). If the jumbo pack of toilet paper is on sale, great, invest in it! You can also stock up on other staples like canned goods and pasta which have a long shelf life.
4. Prepay your monthly expenses
Another smart way to spend your tax refund is to prepay your unavoidable monthly expenses like your phone bill, hydro, gas or water bill.
What do I mean by this? Instead of waiting until the due date for these bills, overpay them now. For example, if your bill is $100 per month, send $200 now. The utility company may wonder why you are giving them extra money, but they will be happy to keep your funds on deposit. Once they have your money, it’s out of your bank account, so you will not be tempted to spend it somewhere else. A better example is loading up your fridge, freezer and pantry on food and supplies you will be buying anyway, but we already covered that in point #3.
5. Hide your money – set up a savings account
If your cash is in your wallet, it is easy to spend. If it is in your bank account, and you see it every time you open your banking app, it is visible, so it is easy to spend. How do you hide your money?
You could have a separate savings account at a different bank where you stash your savings. Since you don’t pay bills from that bank, it is hidden, so you are less tempted to spend it.
Another option is a Tax-Free Savings Account (TFSA). You can’t attach a debit card to a TFSA, and you can’t pay bills with a TFSA. To access your money, you have to make a specific transfer from your TFSA into your chequing account to get your money out. A TFSA creates more barriers before you can spend money than having cash in your wallet. It is a good way to hide your money from yourself and achieve your longer-term financial goals. These may include:
- Buying a home and saving for a down payment
- Home improvements or remodeling
- Going back to school and saving for tuition fees
- A hefty emergency fund, enough to cover expenses in case of job loss
- Enough retirement savings; max out your RRSP
A tax refund is a great windfall in the year to put towards any of these plans for a better financial future. But all these goals require time and consistent saving, which you are more likely to achieve if you can’t easily access your savings accounts for short-term spending.
Should you pay for a faster tax refund?
Now understandably, you may be anxious to get your tax refund sooner so you can kickstart your savings or eliminate any financial burdens. I understand. But be aware that there are companies preying on this anxiety every tax season. You may see signs for instant cash back on tax refunds, where the tax preparation company gives your refund to you on the spot when you file. But while this offer seems convenient, these companies effectively act as lenders and charge you a hefty fee for the instant refund.
If you want your tax refund quickly without extra costs, I recommend filing your tax return online and applying for direct deposit. You can expect to get your full refund in just two weeks if you file this way.
You can also check on the status of your refund with CRA either online or through your MyAccount or MyCRA mobile app.
If you are struggling with debt and your tax refund isn’t enough…
Maybe your credit card balances or other debts are too high for your tax refund to sufficiently pay off. If your debts are causing you undue stress, consider learning more about filing a consumer proposal to get relief. A consumer proposal will help you eliminate unsecured debts while also allowing you to keep your tax refund. Contact a Licensed Insolvency Trustee today for a free consultation to learn more about your debt relief options.