3 great ways to spend your tax refund wisely

Drawing some inspiration from some other great blogs and articles recently, I wanted to ask you – what did you do with your tax refund this year?  Did you spend it wisely?

I’m sure I’m no different than you but we’ve got a bunch of priorities around our house.  Home improvements, paying down mortgage debt, investing for the future and taking some funds to travel and enjoy life are important things to us.  With a busy life and obligations, it’s hard to decide what the priority should be.  Maybe all of these things are worthy candidates?  In no particular order then, here is what I consider some of the best uses for your tax refund this year or any year:

1.      Reinvest in your RRSP

Revisiting a previous post here on my site, if you do not reinvest the tax refund gained from RRSP tax deduction then I believe you are not capitalizing on the true power of this account.  A friend of mine told me recently, he believes RRSPs are misleading to many investors – he is probably right.  While RRSPs are in fact an excellent account for retirement savings, a Registered Retirement Savings Plan could easily be rebranded as a “Registered Reinvestment Savings Plan”.   Meaning, to make the most of this account you should really reinvest the tax deduction as much and as often as you can.  At some point, the tax deduction you get today or what I consider a temporary government loan must be paid back when you withdraw RRSP funds.  Hopefully though, you are withdrawing funds in a lower tax bracket than your contributions of today.  This may or may not be the case for you so you need to use this account wisely.

2.      Invest in your TFSA

Folks who read my blog regularly are probably aware I’m a huge fan of the Tax Free Savings Account (TFSA).  This account is a true gift to Canadians.  You can find out why I adore this account in some previous posts here and here.  My strategy is to use the TFSA to hold Canadian dividend paying stocks that return consistent dividends every month or quarter.  In many cases, the companies I own increase their dividends every year or so:  Bell Canada (BCE) and Fortis (FTS) just to name a few.  My plan over time is to shelter dividends paid as much as possible using TFSAs so in retirement, I can make a few periodic withdrawals from this account to pay for living expenses, tax-free.

3.      Pay down debt

A while back, 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.  If your tax refund was $1000 (even more or even less) I think a good use for your tax refund is to pay down high interest debt (like credit card debt) or your mortgage.  If you have no consumer debt (good on you) then consider making a lump sum payment on your mortgage.  Paying down your mortgage might be one of the best guaranteed investments you can make – because you and I pay our mortgages with after-tax dollars, so even a cheap mortgage rate of 3% is going to feel closer to a 4.5% return on investment.

Sure, you could definitely build an emergency fund or contribute to your child’s education instead of these options – those are excellent things to do too – but whatever you choose to do with your tax refund, consider spending it wisely delaying at least some gratification today.

In case you are curious, this year we did half-and-half:  half of our tax refund was reinvested in RRSPs and the other half was applied to our mortgage.  As much as I can, I try and eat my own cooking.

What did you do with your tax refund this year?

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

8 Responses to "3 great ways to spend your tax refund wisely"

  1. I split it up this year between a trip, a lump sum payment on my student loans, and a contribution to my TFSA. I flip flopped for a while on how much to put on my loans versus the TFSA, and in the end, decided to just put equal amounts to both.

    Reply
  2. My tax refund this year was a whopping $216 dollars which I just put into my savings account which will go straight to paying off the mortgage. May and June for us will be a big hit to our finances this year with the landscaping and now our dogs expensive trip to the vet this week. Tax refunds can come in handy in a variety of ways. Cheers Mark.

    Reply
    1. Hey, a small refund is better than a big refund! If you have a huge refund, this means you just gave our government a huge tax-free loan!

      Tax refunds come in handy is a variety of ways, for sure, but I think they must be used wisely.

      You’re in much better shape than most – your mortgage is almost paid off 🙂

      Reply
  3. I don’t even know how I ended up here, but I thought this post was good. I don’t know
    who you are but certainly you are going to a famous blogger if you
    are not already 😉 Cheers!

    Reply

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