Expecting an income tax refund? Before rushing out to spend it, consider how you can put it to work to enhance your financial future.
You just pushed the send button on your income tax return and you can’t wait for your refund to be deposited into your account. But before you start thinking about using that money for an exotic vacation or a down payment on a new car, you may want to think instead about how it can enhance your family’s financial picture over the long term.
Here are five options to consider:
1. Start an emergency fund
At some time in your life, one of the following things may happen: You will lose your job; your car will break down when you need it for work; or you will need to take extended, unpaid time off work to care for a sick or dying family member. By having the money to cover about three to six months of necessary living expenses in an easily accessible, high-interest emergency savings account or a TFSA (if you have contribution room), you will be better able to financially weather a crisis. Your income tax refund can form the basis for an emergency fund, or enhance your current emergency savings.
2. Top up your RRSP
For the 2014 tax year, the Registered Retirement Savings Plan (RRSP) contribution limit was 18% of earned income from the previous year, to a maximum of $24,270 (with adjustments for company-sponsored pension plan contributions). Yet according to a study by the BMO Financial Group, only 57% of Canadians had made an RRSP contribution for the 2014 tax year before the March 2, 2015 deadline, with the average contribution being $3,737. If you haven’t been contributing the maximum to your RRSP, you can use your income tax refund to help accumulate a larger nest egg for your retirement. The interest on your money will also compound over a longer period than if you only make contributions at the end of each year.
3. Pay down credit card debt
According to calculations by CreditCards.com, the average adult Canadian carries about three credit cards. The Canadian Bankers Association reports that about 60% of Canadians pay off their accounts in full each month – but that means that 40% of us are paying interest rates of 15% to 20% on our outstanding balances. Paying down or paying off your credit card debt will give you more disposable income to boost your retirement savings.