Many weeks ago, I offered up a question for readers to consider: What would you do with $1,000? In that article, I shared what I’d do with that tidy sum if it found me. Whether you save the money, spend the money or do a little bit of both, I said what people do with that $1,000 says a bit about who you are and what your financial priorities are. I continue to feel this way.
Recently, my wife and I got our tax refund back. It wasn’t $1,000 but it was close. A tax refund can be considered a good thing and a bad thing in my opinion. On the good side, we were given money back we really didn’t expect or maybe better said, forgot about. On the bad side, we just gave our government an interest-free loan over the last year. In this regard, I think getting a huge tax refund is undesirable and many Canadians shouldn’t welcome this although many people do. Instead of that money working for you, it’s working for the government. I don’t know about you, but I give the government enough money.
In my What would you do with $1,000? post I mentioned if we had $1,000 of “found money” I’d probably take $250 and spend it, have some fun with it and the rest would be invested.
With our recent tax refund, did I eat my own cooking?
Before I get to my answer here are some things you could do with your refund:
Pay Down High Interest Debt
Take a good look at your debts and pay down high interest debt first. If you are fortunate enough to have no credit card debt or similar high interest debt, consider paying down your line of credit or mortgage, whatever charges you more interest.
Pay Down Your Mortgage
If you have no consumer debt then consider making a lump sum payment on your mortgage. Even if this is the only debt you have, paying down mortgage debt might be one of the best investments you can make (especially if you have a fat mortgage like us for the next 10 years). If your mortgage rate is 4%, you might think that’s not too bad, and it isn’t. However on an after tax basis, since you pay your mortgage with after tax dollars, that 4% rate is probably closer to 6%. I’ve learned over the years that making extra mortgage payments is a guaranteed rate of return, and guarantees in personal finance and investing are a rarity – take ‘em when you can get ‘em folks.
Build An Emergency Fund
Many personal finance experts recommend at least three months living expenses be saved in an emergency fund for “what ifs” in life, like an unpredictable job loss, home repair or medical expense. Building an emergency fund is not as sexy as buying a new LED TV but it’s financially prudent.
Invest In You
Is one of your goals a fitness goal this year? If so, then an option is to take that tax refund and join a fitness club, get some equipment for your home or some outdoor gear to get in shape. While financial capital is important, it’s totally irrelevant if you don’t take care of yourself, your human capital. Investing in you will allow you to do more, plain and simple.
Contribute To a Registered Account
TFSA, RRSP, RESP? Is this investment alphabet soup giving you indigestion? Forget trying to select the perfect account and just save. While the TFSA wins over the RRSP in some areas, the RRSP trumps the TFSA in others and saving for your children’s education via a RESP is yet another excellent option. Do one, contribute to two or go for the hat trick if you can. Just saving and not spending is a step in the right direction I think.
Spend the Refund
We all work, we all count pennies (at least for a little while longer) to save and invest for our future. What not have some fun? Remember, with my little $1,000 windfall, I wrote I would save 75% but I would have some fun with the rest. It’s not a crime to take your refund and book a trip to a sunny destination, get a new TV or get some new duds for the closet. If you really want to do it folks, few people would blame you, life is meant for living.
What’s the best option? It depends on your situation.
What did we do?
Almost true to my previous blogpost we put most of our tax refund on our mortgage and we put a little bit into our savings account. Not very exciting eh? Actually, it’s not so bad. The lump sum mortgage payment provides nice support to one of our 2012 goals and putting some cash into our savings account is starting to make a dent on goal # 6, save some cash to take a great trip later this year.
Recently, I wrote in another blogpost that everyone has priorities and goals and I’m convinced many people are executing on them better than we are. We are however starting to use our money more wisely and that’s allowing us other opportunities and freedoms. A tax refund can be a great enabler but do take some time to think about what’s important to you and make your decision from there. You’ve got lots of options. My advice is to choose wisely.
What would you do with your tax refund?
What did you do and why?