Posted on Monday 20 January 2020
So you got a great return on your taxes—now what? It’s tempting to take that quick influx of cash and turn it into something fun, like a shopping spree or a weekend getaway. But if you really want to get the most out of your refund, you might want to hold off on booking those all-inclusive tickets.
There are plenty of great ways to take your tax refund and turn that money into smart financial moves. After all, your return isn’t coming out of thin air: it’s a percentage of your hard-earned income over the past year. Why not use this opportunity to make your money work for you this year?
If you’re stuck on how to use your tax refund for the greater financial good, don’t panic—we’ve already done the hard work for you. Below, we’ve compiled seven of the best ways to turn your refund into better financial management in 2020 and beyond.
If you don’t have an emergency fund set up yet, your tax refund is the perfect opportunity to start! An emergency fund is exactly like it sounds—it’s a sum of money that you set aside to use for emergencies.
Unlike a rainy day fund (which is tailor-made for those lazy Saturdays where you just want to relax and do some online shopping), an emergency fund is something that you might not touch for months or even years. It’s meant to help with urgent, last-minute expenses, such as:
There’s no set rule for how much money you should have in your emergency fund. If you want to really be prepared, a good rule of thumb is to think about how much it would cost to pay your bills (and then some) for at least three months. That gives you the peace of mind to know that when the unexpected does occur, you won’t risk falling behind on your financial obligations.
Once you have that number written down, try not to panic. It’s likely going to be a high number, and it’s easy to feel overwhelmed—even when you’re using your tax return money as a starting point. But don’t forget that an emergency fund is not something that you complete right away. It’s a slow burn. Build up your emergency stash gradually over time, and start by giving yourself a smaller, more achievable goal (somewhere between $500 and $1,000).
By putting your tax refund aside into a separate account for an emergency fund, you’ll be putting yourself way ahead of the game, making it much easier to start making regular deposits and letting that financial safety net grow stronger throughout the year.
The great thing about getting your tax refund is that you can set up a direct deposit, which usually means that you get much quicker access to that money. But it also means that you can make it a lot easier to save that money by not even letting it touch your checking account. Instead of sending it to your primary checking, why not set up your direct deposit so that your refund goes into your savings?
Cut yourself out as the middle man entirely, and you’ll never have to worry about becoming your own worst enemy. Setting up your direct deposit to a savings account from the get-go removes that all-powerful temptation to spend once you get a sudden influx of cash. (Bonus points if you can keep it in your savings account for a few years and start earning some interest.)
We all have at least one credit card balance that just won’t go away—as soon as you get close to paying it down, another expense pops up and you have to dig that card out of the back of your wallet yet again. Everyone can benefit from paying off a little credit card debt—so whether you are a habitual credit card user or you only use your card every once in a while, you might want to consider applying your tax refund to your credit card debt.
If you have multiple cards, you can choose to put all of your tax refund onto the card with the highest interest rate. Not only will you save money over time by not paying interest charges, but your credit score will get a nice boost, too! Your total amount of credit card debt makes up as much as 30 percent of your overall score, so being able to pay down your balance can create significant improvements.
Applying your tax refund to your credit card debt might be just the boost that you need to start actively paying them down, getting out of debt, and taking control over your finances. (And who wouldn’t want to start out 2020 with that kind of great financial karma?)
Maybe you’re thinking about trading in your old, unreliable car for something a little newer, or you’re finally ready to start thinking about buying your first house. Setting aside a larger down payment can make a big purchase like a new car or a home much more affordable over the long run. Not only will you lower the total amount that you will pay over time, but you also might be able to get long-term advantages, such as a lower interest rate.
And in the case of buying a home, where your initial costs are naturally going to be much higher, you might not even be able to start the homebuying process without a large sum of money set aside for the down payment, closing, and any additional expenses like inspections, renovations, appliances, or moving supplies.
If the next couple of years have some big purchases looming on the horizon, use your tax refund to boost your saving power. If you’ve already started saving, this is a great way to really boost your savings timeline. And if you haven’t started the saving process yet, your tax refund can now become the first step toward making your financial dreams a reality.
Saving for retirement can be a heavy lift—after all, you could easily be preparing to live without a steady paycheque for anywhere between ten to twenty years or more. Every bit helps when it comes to contributing toward your retirement savings, and putting your tax refund towards those golden years can make a huge difference.
If you’ve already started the process of saving for retirement, you might have a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RIF). Or, you could have a Tax-Free Savings Account (TFSA). Whatever account you choose, take whatever funds you get from your tax return and send it straight to your retirement.
The added benefit is that by making a larger retirement contribution today, you are making your 2020 tax burden much lighter. It’s a tax-free contribution, so good news: you can deduct any money you set aside from your income and decrease the likelihood that you’ll end up with a big tax bill next year.
In an age where even your dermatologist visit can be completed in a digital environment, there are plenty of ways to start investing online, all without even setting foot in a financial planner’s office. And if you really want your tax refund to become an investment in your future, investing in the stock market is a great place to start.
Best of all, investing is becoming much easier and much more accessible, making it possible for beginners and professionals alike to create a diversified portfolio right from home. Robo-advisors provide sophisticated algorithms, comprehensive dashboards, and interactive reporting that allows you to take a set-it-and-forget it approach and still see long-term benefits (after all, we don’t all have the time to become investment professionals overnight).
Take a look at robo-advisors in Canada to see your options. It’s a good place for beginners to start investing—and compared to traditional investing, robo-advisors tend to offer benefits like lower management fees, quick access to funds, and 24/7 reporting.
Make a commitment to always invest your tax refund, and you could see your investment account grow by thousands over time. It’s not a bad way to create a safety net—and if you get lucky, maybe even some wealth!
This tax season, it might be time to take a page out of the Parks and Recreation archive of advice and treat yourself. There’s no harm in taking your tax refund and spending it on yourself—but as with so many other things in life, the key to success lies in doing it wisely.
Maybe it’s time to finally pay the entry fee for that certification or class that would have put your mortgage payment in jeopardy, or invest in a stand-up desk to save your back and neck from additional strain at work. Or maybe there’s a work-related conference that might require paying an entry fee, travel, and a hotel stay. Use your refund to take that next step and do something for yourself!
By growing your knowledge, experience, and expertise, you are making an investment in your future. And who knows, that investment may lead to getting a promotion or a raise somewhere down the line, growing your financial health over time.
No matter how you choose to spend your tax refund, take some time to think about your options and choose what feels right for your personal situation and your financial needs. It should be a plan that sets your finances on a path to success—not only today, but five, ten, or twenty years down the line. And while using your tax refund for the greater financial good might not be as exciting as blowing it all on an epic shopping spree, the payoff will be much, much greater.