Some time ago on this site 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.
Recently we got our tax refund back, a couple grand, so more than the “found money” I am referring to above. A tax refund is a mixed blessing really. On the good side, we were given money back. On the downside, a tax refund means we just gave our government an interest-free loan over the last year. On that note, I think getting a huge tax refund is undesirable and many Canadians should not welcome this although I know many people do. This year, I put more money into my RRSP and got a larger tax refund back because of it (compared to previous years). I suppose this created a good problem but I actually prefer to optimize my RRSP instead. I hope to do a better job of managing my RRSP contributions this year…
In a more recent post I offered some suggestions to spend your tax refund wisely. My suggestions included killing off credit card debt, reinvesting the tax refund into your Registered Retirement Savings Plan (RRSP), starting an emergency fund, making an extra mortgage payment or investing in yourself.
What did we do this year? Did I eat my own cooking? For the most part the answer is yes.
Focus Area #1 Mortgage Debt
Since we have little consumer debt (a car payment), I figure part of this refund should go towards killing our greatest liability. I think paying down our mortgage is one of the best investments we can make. If your mortgage rate is 3%, you might think that’s cheap, and you’re right. However on an after tax basis, since you pay your mortgage with after tax dollars, that 3% rate is probably closer to 5%. That’s a decent guaranteed rate of return when you pay down your mortgage. So, about half of our tax refund was put towards the mortgage.
Focus Area #2 RRSP
RRSPs are a great financial tool because the contribution you make to this account lowers your taxable income. Although this RRSP-generated tax refund is really a long-term loan from the government (it’s a tax-deferred account you recall), at least I can shelter present value monies from taxation for a future tax payment I’ll be required to make. A good portion of our tax refund was reinvested into our RRSPs.
Focus Area #3 Fun?
With maybe a couple hundred bucks leftover from the tax refund we are considering buying some patio furniture later this spring for our deck. Then again, we can easily save for that money.
This year our tax refund was directed to areas #1 and #2. Next year it might be different. Stay tuned to learn about what we do in the future and why.
How did you spend your tax refund this year? What do you make of our choices?