I’ll start this blog off with a hard reminder: readers, the tax deadline is April 30th, 2018. Tie a bow around your finger, write it in your phone, pin it to your fridge and get all your important documents ready well in advance!
But what happens when that long-awaited refund arrives in the mail?
Anyone who has put money into a savings vehicle like an RRSP over the past year can expect money back from the government. For many, this quick lump sum injection of cash is treated like a gift – an excuse to splash out on a getaway or long-awaited purchase. And, while you can do whatever you like with your refund, think wisely about how you use it.
Your refund is money you’ve been given back in return for investing in your long term financial health. In that case, it makes a lot of sense to keep the pattern of investment going, rather than simply letting the money go to some other use.
If you’re carrying some debt – and let’s be honest, with a debt-to-income ratio averaging close to $1.70, most Canadians are – using your refund to pay some of that debt down is the number one piece of advice most financial experts will give. You can make reasonably accurate predictions about how much of a refund you will receive in a given year: make this part of your debt reduction plan. If you know the interest rate on your debt, and know the approximate sizeof your return, you can minimize the negative effect of interest at the very least.
Think of it this way: paying down a 19% rate credit card balance is the same as returning 19% after tax on an investment.
Contributing back into your RRSP can also be a great way to boost the rate at which you save money. According to David Hodges of Moneysense.ca : “ If you contribute $5,000 to your RRSP each year and your marginal tax rate is 30%, you’d receive a refund of $1,500. But if you reinvest that next year along with your regular $5,000, your RRSP contribution will be $6,500, netting you a $1,950 refund. After 10 years of continually reinvesting your tax refunds and 5% annual growth, your savings would be increased by more than $23,000.”
That’s a huge difference, and one of course compounded by the effect of time. However, as a step toward longer term planning, this gives you an idea of how your refund can be used to create a path toward greater financial efficiency and savings potential.
There are many, many ways to use your refund in a productive, financially responsible manner. These are only some of them. We always recommend taking the time to speak with a professional tax advisor if possible. The key point here is to remember that your tax refund doesn’t just represent money you have in hand: it can be a seed that grows and builds your financial health.