How to make the most out of your tax refund

As the majority of Canadians leave completing and sending their tax return until April, this is the time of year when most people find out if they’ve gained a tax refund and if so, how much. Often a tax refund is due to paying too much tax, normally income, throughout the year and this can result in people receiving a varying amount of money in their tax refund. There are also some other factors that will determine whether or not you are entitled to a tax refund including your gross income, the withheld tax amount and the length of time you’ve worked in Canada. Those who are entitled to a tax refund will usually find out and receive their money within four to six weeks after sending in their tax returns. Even if you are extremely organised and send your tax return early, you normally won’t hear back before March as this is the time when most forms are processed. Some people only receive a few extra dollars, while for others their tax refund can be a substantial amount. It is tempting to look at the money gained from a tax refund as a financial bonus and head straight out on a spending spree. Research has found that even those who believe they are being virtuous and putting the majority of their money to financial use are often spending the money without realising it. To stop yourself from wasting the money and make it work for your long-term financial future it is important that you spend some time deciding how to make the most out of this sudden lump sum of money you’ve received. To do this you need to take an object view of your current financial situation. Do you have a lot of debts? Do you need to start saving for your child’s college education? Are you planning to buy a house in the near future? All these questions will have an impact on how you choose to spend, invest or save your tax refund. As well as this, the amount you actually receive will also have an impact on what you do with it, but however small the amount you gain it is important to remember that putting even a small sum of money to good use can have a positive impact on your long-term finances.   Pay off debts In 2012 a CIBC survey found that 72 per cent of Canadians were in some sort of debt, while that same year a different study found that the average personal debt was $13,141. It is unlikely that two years on from these studies that the average amount of debt Canadians are in will have changed drastically, so it clear that for the vast majority using their tax refund to pay off debts is the smartest move. If you do have a large amount of debts it might feel that if you gain a small tax refund it won’t make much difference, however if you take into consideration the interest rate your debt is accumulating even paying off a small amount of the debt is the financially savvy thing to do. For many people it can be tempting to earmark the extra money for their savings account, but again the interest your debt is gaining is a big factor into why it is better to pay off debts before seriously starting to save. Normally debts have a much higher rates of interest than savings accounts, so in the long-term having debts loses you more money that having a substantial amount of savings gives you. When paying off debts the best way to decide which to pay off first is to look at the ones which have the highest interest rates. Normally these are credit cards, so if you are a regular credit card user and don’t pay off your bill in full each month use the money to pay off some of your credit card bill. Once your highest interest rate debt is paid off look towards paying off the next biggest debt you have and then gradually work your way down. Being in debt can not only have a negative impact on your finances but also on your health and wellbeing. Many people in debt are stressed about the money they owe and for others it can cause sleepless nights and anxiety. Again it can be tempting when you receive a sudden sum of money to spend it on something that will make you happy in the short-term, but remember for your long-term financial security and health and wellbeing it is better to put the money towards paying off credit cards, loans and other forms of debts.   Put into savings If you’re debt free or only have a very small amount of debts, then think about putting your tax refund into a tax free savings account (TFSA). A report in 2012 found that although 47 per cent of people surveyed had a TFSA set up only half of those actually contributed to the account that year, so it looks like while most Canadians have the intention of saving many don’t actually get round to putting the money into their savings account. The lump sum of money you get from a tax refund is perfect for adding to your savings; you didn’t know you were going to get it so therefore it is not necessary to your everyday living expenses. Also researchers have found that it is easier to save a large chunk of money rather than putting a smaller amount into savings each month. TFSA are one of the best types of savings accounts for those looking to save a large amount of money. When choosing a savings account several things need to be taken into consideration including the interest rate and the access to the money you’ll have. Some accounts have higher interest rates but only if you don’t withdraw any money for a set time period, while others often have lower interest rates but provide you with more access. Invest If you are not keen to put your tax refund into a savings account, consider investing the money. This is a great option for risk-takers who are keen to try and make some extra money. Investing a tax refund has the added bonus of if the venture fails to make a profit, or even loses money, you haven’t risked too much. The way most people invest money is through buying stocks or shares. If you are thinking of doing this then it is a good idea to spend a lot of time in studying the market and researching the best options for you. The advantage of investing in stocks or shares is that they can require as little as $50 to invest in, so even if you only receive a small tax refund this option is still available to you.  When investing in stocks and shares remember that it usually takes time for the investment to make a substantial amount of money and that the key to succeeding in the stock market is knowing when to sell your stocks or shares to gain the maximum profit. This is why it is vital that you spend a lot of time prior to investing researching the market and once you’ve invested your money ensure that you regularly keep up with what is happening to your stocks or shares. Many of those who receive tax refunds are self-employed and if you are a business owner it makes sense to invest the money back into your business. Use the money to develop new products or to fund the resources that enable you to offer more services. Alternatively, the money can be used to upgrade computers and technology or towards a new PR or marketing campaign. Saying this, it is important that you don’t spend the money just because you have it, instead if there is nothing you need right now it is better to put the money aside for when you do need a little extra funds to see you through a difficult sales period or when equipment desperately needs updating. Always keep in mind that it is better to have your own financial resources available for when times get tough, rather than having to take out extra loans or credit to stay afloat. Splurge For those who are cautious with their finances all year, who have little debt and who regularly save, then the tax refund is a perfect excuse to splurge on a shopping trip or a much needed vacation. Although if your naturally cautious with money it can be tempting to put all your tax refund into a savings account or into investments, however, by allowing yourself to spend it on yourself and buying something you’ve wanted for a long time it can be viewed as a reward for being good with your finances year-round. Even if you are putting the majority of your tax refund towards paying off debts or into a savings account or investments, it is still a good idea to put a little aside to buy something for yourself. Since childhood we are taught to reward ourselves with treats, so it will feel like less of a sacrifice if you are having to put this extra money towards long-term good use if you are able to use a little of it to purchase something immediately for yourself. At the end of the day if going for meal out will help you to put the most of your tax refund to good use then perhaps it is an investment after all.   Long-term finances When managing your finances it is always important to take a look at the long-term. This means when taking on debt consider how long it will take before you can pay it off and how this will impact your finances during that time. Alternatively when saving, consider what you’re saving for – a pension, a house or a vacation. This will determine the type of savings account you take out and how much you put into it. In just the same way, you need to take this long-term approach to your tax refund. Many of us are still living in a time of financial austerity, so the days of being able to spend money without giving it a second thought, even an unexpected financial bonus, are long gone. Instead it is vital that you take the time to think about how you can best use the money to help improve your long-term finances. For the majority of people this is probably through paying off debts, while for others it is putting the money into a high interest tax free savings account. For risk takers looking to earn a little more money than a savings account will provide, investing the money in stocks or shares might be the best option. While for business owners, putting the money aside to invest back into their business is usually a sound investment.   So, whatever you decide to do with your tax refund always remember that what you do today will have an impact on your long-term finances and as a result will also impact your quality of life in years to come.