Spend it, save it, reinvest it and more – there are lots of things you can do this spring to manage any tax refund. And it could be a lot of money for some.
According to CRA stats, the average tax refund is around $2,000.
Not chump change!
So, to make the most of your tax refund, let’s look at five smart ways to manage that tax refund and put that money returned to you – back to work.
5 Smart Ways to Manage Your Tax Refund
On a personal note, we (Mark and Joe) wish to avoid a huge tax refund every year.
Why?
Any tax refund is really a government / Canada Revenue Agency interest-free loan returned to you because it’s your money.
Getting a large tax refund should be considered inefficient tax planning since a (large) refund implies you paid more tax than you really needed to during the year, and it’s reconciled as part of your tax return. Instead of you using that money, making advancements on your financial plan, the government keeps your money and makes interest on it.
To reduce your payroll deductions, as one tax source, you can consider filling out the Government of Canada form T1213 Request to Reduce Tax Deductions at Source and send the completed form to your nearest CRA tax centre.
The government will then send you an approval to reduce your withholdings (if you qualify), which you should send to your employer’s payroll department. Depending on the amount, you could see a significant increase in your take-home pay.
Whether it’s $2,000 or $200 or anything in between, here are 5 smart ways to manage your tax refund.
#1: Kill Debt.
We say this because it was a top priority for us – for many years until we had little to no debt, including our respective mortgages.
We believe this should be a top priority for everyone who has credit card debt or related consumer debt. Because let’s face it: the longer you pay other people first via debt, the less money you keep for yourself.
#2: Invest in Yourself.
Yes, instant gratification is great (to spend your tax refund today) but you might want to consider using the money to invest in the biggest capital asset you’ll ever have: you.
Do you have dreams beyond your existing role at work? If so, then consider using your return to invest in yourself. Put your tax return money towards more education, more skills, or some growth in your side-hustle/personal passion projects.
This is an especially good idea if it will help to boost your income in the long run!
#3: Invest in your Child’s Post-Secondary Education.
We read that the tuition fees for post-secondary education might actually increase at a rate that is higher than the rate of inflation over the coming years. Yikes! So, if you have a young, growing family, do consider starting to save for them and their education.
Putting your tax refund towards a Registered Education Savings Plan (RESP) can help you get a jump on saving for that post-secondary education.
Plus, a reminder with the Canada Education Savings Grant (CESG), the government will kick in an additional 20% of your RESP investment. That’s $500 annually, up to a lifetime maximum of $7,200 per child.
#4: Start or Build your Emergency Fund.
As much as we (Mark and Joe) also like planning and long-term retirement income projections, life will always be subject to change.
We believe in a small crisis, this is the worst time to take on more debt. Having an emergency fund in place is great to 1. avoid debt and 2. get through some short-term financial calamity at the same time. Win-win.
Generally, we believe most individuals or couples should consider having at least 3 months’ worth of living expenses saved in cash/cash equivalents at all times.
#5: Build up your Down Payment for a Home.
If home ownership is part of your future plans, do consider depositing your tax refund into a ‘down payment fund’.
The more recent Tax-Free First Home Savings Account (FHSA) is a great option for that.
5 Smart Ways to Manage Your Tax Refund
When it comes to tax planning, our general advice is: don’t assume a big fat tax refund every year is a good thing.
Beyond the obvious choices like using your tax refund to invest inside your RRSP or TFSA, we wanted to offer up the other options above – since if you’re looking forward to your juicy tax refund it simply means the government kept some of your money and you could have had it working for you instead throughout the year in different ways.
Financial planning is important at every stage of life and age for success.
We know.
At Cashflows & Portfolios, we’ve both reached financial independence sooner than most, and part of that success was realized by making consistent, smart decisions, including how to manage our tax refund every year when we got one.
The specifics of your personal financial plan and retirement income plan could be VERY different from someone else – in fact, it probably should be!
Personal finance is forever personal.
We can help with that personal finance planning too…
Need any support with your retirement income projections?
Knowing how to save and invest wisely, to help you get the most out of your portfolio, is something we know about since we’re both now financially independent and working on our own terms.
As passionate DIY investors ourselves, we now offer up our time and expertise to help other DIY investors.
We know we can help you out too at a low cost compared to pretty much any services charged by others!
If you are interested in obtaining private projections for your personal financial scenario, read more about our retirement projections services.
A reminder to all loyalty members who have previously used our services, you always get a phenomenal 50% discount on any future retirement income projections reports tailored to you.
Thanks for your readership, and we look forward to hearing from you on this subject or anything else!
Mark and Joe.