16 March, 2016

Tax Refund: Invest or Pay Debt?

 

What you should consider doing with that tax refund.

When you get a healthy tax refund, it can be tempting to think of all the ways you want to spend it. An extravagant vacation. A down payment on a new car. There are so many possibilities. But it turns out that most Canadians tend to be pretty responsible with their tax refunds, and that’s a good thing.

Roughly 40% of Canadians planned to use their refund to pay bills or reduce debt, while 25% planned to invest it. Only 14% thought they would spend their refund on travel or leisure, while the final 9% said they would put their refund toward a mortgage payment1.

While the order or importance will be different for everyone, here are a few additional ideas for things to do with your tax refund:

1. Pay off high interest debt

Before you even think about spending your refund on something more fun, it’s a good idea to pay off your credit cards, lines of credit or other debt that’s costing you a lot of money in interest.

If you need an incentive, think about what you will be able to do with the extra money you’ll have in your budget when you are debt-free. If you took out a loan to contribute to your registered retirement savings plan (RRSP), consider paying that off right away, too. Otherwise, any tax benefit you received from that RRSP contribution may be lost due to interest payments.

2. Invest or save

It might seem obvious, but you can never have too many reminders! Chances are you haven’t budgeted for that tax refund yet, so you won’t really miss it if you put it away for a rainy day or invest it in something longer term – like your retirement.

3. Make a lump sum mortgage payment

If you don’t have any debt to pay off, and you’re comfortable with how much you’re investing, consider using your refund to make an extra mortgage payment. (Be sure to check with your mortgage provider first, some mortgages don’t allow for off-schedule payments.)

If you get into the habit of putting part of your tax refund toward your mortgage every year, you could be living mortgage-free a few years sooner than you expect and will have paid less in mortgage interest over the years2. Think about the impact of that on your monthly budget!

4. Do (or buy) something fun

We don’t think you should spend your entire tax refund on a tropical vacation, unless you happen to be debt-free, mortgage-free and well invested. But it’s okay to treat yourself a little. So go ahead and have a nice meal out or buy that really good bottle of wine you’ve been coveting.

Need help deciding on the best way to spend your tax refund? Contact us today.


Sources:

1 BMO Nesbitt Burns Tax Study

2 Mortgage Payment Calculator