Posts tagged ‘what to do with your income return’

How to best use your Income Tax Refund?

If you got a refund on your income tax filing this year, congratulations, but now the important work begins: what to do with this money and how to budget it? Obviously, different people will have different ways of using and allocating this money, but generally speaking, there are better ways to use it than to just spend it all on a vacation or purchasing big ticket item etc. Also, the amount of your refund is also a big factor in what you do with the money; if your refund just around one hundred dollars, then save yourself the budgeting and all the thinking and just spend it any way you like, since it is an insignificant amount. On the other hand, and this article is based on the assumption that your refund is couple hundred dollars or more, then read on to help you get ideas on what to do with the refund:

Roll it over to your RRSP to get another refund next year
This would be the first and best use of any refund money. Depending on your situation and the amount of refund you got, you may redirect some or all of the money to your RRSP, and that in turn will generate another – or bigger – refund next year. This also accelerates your retirement nestegg, especially if you started saving a bit late.

Pay down debt
For some, this may be the bigger priority over their RRSP savings and that is totally understandable. If you have a big debt and got a big refund, then it makes sense to dedicate most if not all of your refund towards paying it down. On the other hand, if you only have a small debt left (say $1000) and your refund could cover all of that, then it is easy to figure out that you should use your refund to get rid of this balance.

Save it towards a big purchase or goal
Again, depending on what you are saving towards, whether there is something specific or just general savings – including building an emergency fund – rather than spending the money, best to save it and feel good about yourself. This is a way to help you look back in the future and have something to show for your hard work. In fact, assuming you get refunds that are $1K or more, and assuming you save even $250 of those each year, in couple of years, you have saved over $1K without much effort

Donate to a charity
This is something not a lot of people think about, but you should contribute a portion of your refund to help a charity: you get to help and feel good, while also getting a tax deduction: two in one!

Last, and certainly least: spend and enjoy it?
If, and this is a big if, you happen to be a lucky person who has no debt, has enough money saved and has maximized their RRSP contributions, then by all means go ahead and enjoy the money, be it to buy something new, book a vacation, or other ways that are specific to you and your lifestyle.

As mentioned, while some may prioritize their RRSP savings or paying down debt, at the end of the day, some combination of the above is the best way to go. Once you know what your refund amount is, sit down and spend some time going over what the money will be used for, and write it all down. Then come back to it a few days later and review the list again, to avoid the chance of forgetting any important item. Once you have confirmed how the refund will be divided, go ahead and take action by distributing the money accordingly.