Last year, we had time to think as our personal tax returns were not due until September due to the pandemic. In fact, last year, many people just needed their tax refunds to stay afloat. This year our returns return to the tax filing deadline of April 30th. Many people have already filed their returns and received their refunds for 2020. But we still face the same dilemma if not worse after a year of pandemic unemployment and lockdowns.
Probably the last thing on anyone’s mind during the pandemic is doing their taxes. Even though our favorite restaurants and stores might still be closed, the Canad Revenue Agency (CRA) isn’t. Here’s the good news: outside of those in special circumstances or the self-employed, tax time could mean you will still be receiving a refund.
So, let’s change our mindset if we can. The obvious follow-up question to that is what are the best and smartest things you can do with your tax refund? If you have the opportunity. Unfortunately, not everyone does.
While it’s more fun to spend your tax refund on something for yourself, it’s a great opportunity to forego immediate gratification and set yourself up for success down the road. One of the best things you can do with a new infusion of cash is put it towards your retirement by investing it. Sure, you’re not going to feel the impact immediately, but when you start to look at what compound returns can do for you—you’ll greatly appreciate the potential benefits just by investing now for later in life, like your retirement.
This past year taught us a lot. But the biggest lesson we can take from it is that the future is uncertain. And having access to cash quickly if there’s an emergency or another pandemic is critical. If you don’t already have three to six months of living expenses saved as well as a little extra cash for unexpected occurrences, putting at least a portion of your tax refund into a savings account could be the ideal move. Better yet, consider a Tax-free Savings Account (TFSA).
Pay down debt
Whether you have credit card debt, a car loan, student loans, or any kind of debt, one of the best financial moves you can make when you have extra cash is to work to get ahead by paying down your debt. Not only does this lower the amount of debt you have, which improves your credit score, but it lowers the total amount you are going to pay for the lifetime of the loans.
Remember, a large chunk of the money you pay on debt is interest. And most of the time, that interest is calculated as a percentage of the money you still owe. Unless you have a prepayment penalty, paying off that debt early can help you to save a ton of money on the interest.
Invest in yourself
Interested in getting ahead in your career? Thinking about a new job? Considered experimenting with a side hustle? Investing your tax refund in yourself may be a smart move. By taking the money and growing your skillset or building a new revenue stream, you could greatly multiply the positive impact of that extra cash for years to come.
If all of these sound like great ideas, you may feel stuck on how to decide. Try writing down all of the options that you’re considering and look at the potential savings and gains from each option, as well as the short-term and long-term pros and cons. Once you start to compare the different courses of action side by side, the right move should become clearer.
I know this may all sound like pie in the sky, but don’t look over the opportunity. There is also tax planning strategies that your may employ that may reduce your tax withholdings and increase your tax home pay rather then putting in a CRA bank account and waiting for them to issue a refund. That’s why it may be a good strategy to talk to a Financial Planner. That’s what Northern River Financial is here for. A quick message may mean the world of difference to you in Keeping Life Current.