I stumbled upon this article after reading Rob Carrick’s best reads column recently. I found it interesting to learn what some personal finance experts felt was the best thing they ever bought with their tax refund.
Here are some of the things from the article:
- People bought a jeep or an older car in cash for a few thousand dollars.
- People purchased a Kindle.
- People took a trip to Vegas.
Other bloggers took a route I’m more familiar with, they reinvested most of their money back into their portfolio or made an extra mortgage payment. First of all…there is nothing wrong with having some fun with your tax refund. Just realize this is not a windfall. A tax refund is a mixed blessing really. On the good side, we get money back. On the downside, a tax refund means we just gave our government an interest-free loan over the last year. If you consider your tax refund from that perspective then getting a huge tax refund is undesirable for many Canadians – unless of course your sizeable refund was generated from a major Registered Retirement Savings Plan (RRSP) contribution. This is a good thing.
Here are my suggestions for good things to do with your tax refund. The best thing to do will vary.
Pay off credit card debt
Yes, maybe boring, but the sooner you rid yourself of consumer debt the sooner you can enjoy the money you make.
Save for retirement
Saving for tomorrow is not only smart but if you sock some or most of your tax refund into your RRSP, you’ll be well on your way to getting an even bigger tax refund next year like I mentioned above. You may also consider trying to maximize your Tax Free Savings Account (TFSA) every year. Contributing to your RRSP and then using the refund to fund your TFSA is a great one-two investing punch.
Start an emergency fund
When you least expect it, $hit happens. Instead of putting these emergencies on your credit card consider building up a small emergency fund to plan for the unplanned.
Make an extra mortgage payment
We’ve done this in the past because killing debt remains important to us.
Invest in you
Want to improve some skills for the workplace or turn your hobby into some side-income? Investing in yourself is always worthwhile since your human capital is really your greatest asset.
You might be wondering…what did we do this year? Did I eat my own cooking? Yes. We reinvested most of our tax refund back into our registered accounts and we used the rest for savings.
What do you do with your tax refund?
I paid down debt and invested the rest.
Seems pretty smart!
Talbot Stevens does an excellent job of explaining how to get the most from your RRSP. It’s important to contribute the optimal amount to your RRSP to benefit the most. Here’s a nifty calculator that helps you:
Thanks for sharing Sean. I think the RRSP is a great account but it’s not for everyone, it really only benefits those who know for sure a) they will be in a lower tax bracket come retirement and b) the refund is always reinvested.
My biggest refund ever: 29k, went straight into a lump sum mortgage payment.
The debt is so scary, so i am preparing for the inevitable vancouver real estate crash.
I had to borrow so much for property here. At least now i am at a debt of 50% of property value.
That is a massive refund but smart to put it on the mortgage.
Debt is scary but I suspect when we have none it’s going to be a GREAT feeling!
Small refunds coming here too. Wasn’t expecting it but retirement has some side benefits and taxes are on of them.
I will be maxing out our TFSA ‘s when I come back from the next trip.
No doubt you’ll be maxing out your TFSAs Deane. Are you moving assets from non-reg. to TFSA or moving RRSP withdrawals to TFSA? Or both?
Everything is so true. I spent 100% tax refund within 2 days in purchasing Canadian dividend stocks. Haha
Nothing wrong with Canadian dividend paying stocks. Happy to own 30 of them 🙂
All good options, and when in doubt I’d say pay down debt. You can never go wrong with paying down debt, especially any high interest consumer debt
Agreed with the high interest consumer debt. Very bad stuff!
I would have blown my tax return on my upcoming vacation but recently I’ve always owed money to taxes. Not a big deal since I have the money put aside and the government never got a tax free loan from me.
Owing taxes isn’t great but a tax-free loan and lots of it to the government is not good either as you know!
I’ve had a big refund this year so, I’ve put $2,000 into my TFSA to top up my emergency funds and the other $200 towards my curling fees for next year. Curling keeps me fit (always good health wise! ) and keeps me sane during busy season at work.
Smart call on the EF. Curling is a great sport, I wish I was better at it. I enjoy watching it, especially the big tournies/bonspiels! Thanks for the comment KC.
If the refund is a result of an RRSP contribution, keep in mind that this money will likely be taxed back when the RRSP funds are accessed. I’ve seen many people rant and rave when they start to use the RRSP funds and it is taxed. Best to understand right from the get go that it will have to be repaid and not do something frivolous with it.
True, it’s just a cycle but I don’t mind the tax-deferred growth Lloyd, much better than paying taxes today and I fully expect to be a lower tax bracket come retirement when the money is taxed and pulled out. I have maxed out my TFSA for 2015 so I needed to put the money somewhere efficiently. Thanks for the comment again!
Finally started an emergency fund. Further to the lump sum, I also automated a $25/month contribution to the EF. The intent is to put the next few refunds (assuming I’ll get more in coming years) until we reach about $15 – 20K. I have it in a Tangerine Self-Directed TFSA account, invested in the Equity Growth Portfolio.
I invested it as I did, with the thought that if I never touch it, it’ll be a nice gift to myself in retirement. 🙂
Sounds like a smart game plan Tom. There are always things that pop up that you cannot predict. An example for us a few years ago was a blown sump pump. It was nice to have the money there and not worry about more debt. Thanks for the comment.