The correlation between those who do their taxes early and receive a refund is very high. Why wouldn’t it be? Having an unaccounted-for amount of free cash flow coming in is exciting. However, what we do next with the tax refund is most important. While some people fall guilty to the mental accounting of thinking it is money that’s free to be spent however you wish, there are much better ways you can be using the funds.
A tax refund is often the result of prudent financial discipline from you and your family throughout the year, so how do we ensure that it does not waste? Here are a couple of options I think every Canadian should consider when receiving a tax refund
Get a head start on your RRSP contributions – You should utilize your tax refund to get a head start on your RRSP contributions for the following year. Also, helping you get ahead of being a last-minute contributor to your RRSP on Feb 27th ( you know who you are). Re-investing your tax refund to your RRSP will only mean more tax savings next year.
Put that money into your TFSA – You received after-tax money back on your return. It would help if you kept it in a tax-free environment by investing it into your TFSA.
Pay down debt – If your goal is to free up cash flow, maybe putting that refund towards debt to lower your payment amounts or reduce the interest, you will pay. Look to which debt instrument has the highest interest rate and pay that account down first.
Each of these options will result in a positive change in your net worth. That should be the intention of tax refunds. Keep this habit in mind each year, and you will find you will be one step closer to your financial goals. I challenge you to avoid the short-term satisfaction of a frivolous purchase and decide what will benefit you the most.
