Is your 2021 tax refund burning a hole in your pocket? Or maybe this year’s refund is already spent, but you’re feeling regret about how you used it.
While it’s fun to splurge a tax refund on something fun, like a vacation or shopping spree, there are some more strategic — OK, boring — uses that may improve your financial situation, now and in the future. Here are a few to consider.
Smart uses for your tax refund
1. Pay down existing debt
If you have outstanding debt — especially high-interest credit card debt – consider using your tax refund to make a dent in the principal. Making only the minimum payment on your credit card can cost you hundreds of dollars in interest and take a toll on your credit score. Your tax refund could help you jump start a strategy known as the debt avalanche, which suggests paying down the debts with the highest interest rates first.
2. Start or add to your emergency fund
An emergency fund is money set aside for unforeseen events. This could include job loss, an accident or illness, or even just unexpected things that come up, like car repairs. Finance experts suggest having at least three to six months’ worth of living expenses in your emergency fund, which is no easy feat. But even a couple hundred dollars can go a long way in the face of an unexpected expense, so if you’re getting a tax refund this year, consider stashing it in a savings account and adding to it over time.
3. Top up your TFSA
If your emergency fund is in good standing, consider using your tax refund to open or top up a tax-free savings account, an account that earns tax-free interest. TFSAs make sense for both short or long-term financial goals like next year’s big vacation or the down payment on your future home.
4. Make an extra mortgage payment
If you already own a home, consider using your tax refund to make an extra payment toward the mortgage principal. It can be rewarding to see the balance of your home loan drop, especially if you’re a first-time owner. Be mindful of your mortgage contract, however, and ensure that you won’t pay a fee for making extra payments. Even some closed mortgages may allow borrowers to make a few extra payments without penalty.
5. Contribute to your RRSP
Like boosting your TFSA balance, using your tax refund to make an extra contribution to your Registered Retirement Savings Plan, or RRSP, is a smart financial move. Canadians often associate putting money into an RRSP as something to be done right before tax season, but you can contribute at any time of year as long as you stay within your deduction limit. Contributing any extra money you have to your RRSP, especially at a young age, can be incredibly beneficial thanks to the power of compound interest.
6. Open an RESP
Opening a Registered Education Savings Plan, or RESP, is another financially-savvy option for your tax refund. An RESP allows parents, friends and family members to put money into a tax-free account that can help pay for a child’s post-secondary education. The average cost for an undergraduate program in Canada for the 2021-2022 year was $6,693, a 1.7% from the previous year. Now, consider how much that could jump in five, 10 or 18 years. It’s never too early to start thinking about how to cover tuition costs, should the child choose to pursue college or university.
7. Improve your home
A tax return can be a great way to fund home repairs and upgrades. Maybe you have a big project to tackle, such as redoing a bathroom or renovating your kitchen. Spending your money on home upgrades is an investment that could shrink your home insurance bill and add value to your property in a way that pays off handsomely when it comes time to sell.
8. Invest in yourself
While tackling debt, saving for the future and improving your home are all worthwhile uses for your tax-season windfall, don’t forget that you are also a smart investment. Maybe you’d like to start a side hustle, treat yourself to a monthly massage, or complete a professional certification. Though they might not earn compound interest, these types of investments can yield a sense of wellbeing and set you up for future success in a way that’s truly priceless.