Tax season is already almost over with a first deadline to file your taxes on April, 18 for people in the US and May, 1 for people in Canada. This year nearly 70% of all taxpayers are expected to receive a refund check. But when looked closely, what people actually do (or at least plan to do) with their well-earned tax refunds vary a lot!
A lot of my friends believe that taxes are complicated or uninteresting, but personally I enjoy doing my taxes. As I am from Europe, where you nearly always have to pay something (and often a lot) when comes tax time, I definitely like filing my taxes because here in North America it’s the exact opposite since (usually) you’re getting money back on tax season! Of course the lower you get as a return the better it is because basically it’s only your own money that the government is giving you back, but still it feels great getting this yearly bonus.
In Canada in 2016 the average tax refund amount was $1,682 (CAD), while it was around $2,700 in the US. That’s quite a lot of money and definitely something which should be planned ahead of time. So here is my top 5 smart ways to get the most out of your tax refund this year!
“66% of all taxpayers are expected to receive a refund check this year.”
Pay off your debt
This one should be a no-brainer. Even if it’s like the first option which comes to mind, did you know that only 31% of people actually use their tax refund to pay off their debt? This is often because people forget about compound interest.
Resist the urging temptation to book a vacation with your refund and do yourself a favor and tackle that debt you’ve been avoiding instead. Start with debts with the highest interest rates. Eliminating these will save you the most money in the long run. If you don’t have any credit card debt, use your tax refund to reduce your car or student loan debt. Just remember that it could destroy you financially if you ignore your credit card debt.If your student loan burden is overwhelming you, use your tax refund to give yourself a breather!Click To Tweet
This is a great opportunity to pay down a chunk ahead of time and put yourself in a better position for this year. Who knows, you might also be willing to refinance your student loans once you’ve paid down a chunk of it (check out LendEDU if you’re willing to refinance they’re great).
Beef up your emergency fund
Remember when you had that medical bill not covered by your insurance plan last year and had to pay $1,000 from your own pocket? Not your best day at all. Now’s the time to start your emergency fund if you have not already. If you do not have any savings but are debt-free, use this as a golden opportunity to start one. I plan to use my tax refund mainly to fill up my emergency fund with my upcoming tax refund. As I relate each month in my financial reports, I personally chose to have at least $5k in my emergency fund for this year.
Also remember to take advantage of living in a modern era with online banks, and benefit from their outrageous advantages, like free checking account, high saving accounts interest rates and big cash back! Do not let your money stay idle in a crappy account with a low (or even 0%) interest rate. If you’re in Canada, you should definitely check out Tangerine. I’ve just switched a few months ago and I’m really happy with them so far!
Save (more!) for retirement
Were you a late bloomer in the retirement account game, like me? Are you behind on contributions? Do you even have an IRA/TFSA? A whaaat? If you answered yes to any of these questions, you might definitely benefit from opening or upping your contributions to an IRA/TFSA! Also remember that if you have an employer offering a 401(k) match or an RRSP contributions matching, you SHOULD be using it as this is free money you’re giving up if you’ve not opted for it!
Use this as an opportunity to start investing your money. You don’t need to have a ton of money to be an investor. I’ve started only a year ago using Wealthsimple, and it’s so great so far. You can check out my complete review here. It’s low-cost, it’s optimized, it outperforms pretty much anyone who thinks they’re good at picking stocks. And all you have to do is click here to get started — in the long run it’s the smartest thing you can do with your money, and it takes 5 minutes to get started.
Fund your goal(s)
You might have been thinking for a few months about how you’re gonna fill up this dedicated account you set up some months ago for your next vacation trip. With your upcoming tax-return, this is a free pass to fill up this account as soon as it hits your bank account so don’t miss it.
Remember this expensive gift you wanted 6 months ago? If you still want it, now might be a good time! In case you changed your mind, why not plan ahead and fund a dedicated account for your future spending money? Take the chance with your tax refund to allocate some of your money to be put to good use and drop some in a dedicated account to fund your future goal!
If you’re ahead of your time, and if you happen to live in Canada, you might have heard of the new application Mylo. If you’re part of the lucky guys being on the beta, you might notice that you can define a goal on Mylo (actually many different ones!). What’s awesome about Mylo is that you can boost your automatic contributions with one-time contributions. Feel close to a goal you’ve set some times ago? Drop some money from your tax refund with the boost feature, and make your future self proud when you’ll look back.
Invest in yourself
Why not invest in a class or lesson from something you love? Whether it be to start a new side hustle or just to do something that you love, use your money while also doing something which will benefit YOU! The keyword here is to never stop learning, as you do not really know what will next year be made off!
For me this is quite simple, as outlined in my Goals For 2017, I’ve chosen to read more about personal finance this year, and I’ve started to read some books to improve my personal finance skills. My favorite this year would be (ok I’ve read like two books so far this year) The 4-Hour Workweek from Tim Ferriss.
Bonus: spend (some of) it
Once you’ve made some responsible choices, feel free to spend the rest! Or, as I prefer to do it, take the opposite approach. Start by spending like 10% of your tax refund and use the rest of your refund to top up your (missing) contributions and beef up your emergency fund. Just be smart about it!
So here are my top 5 smart ways to spend your tax refund. I personally chose to increase my emergency fund and to catch up for some missing contributions to my tax-deferred accounts!
Be smart about your money and make some strategic moves that will pay off in the long run (always remember the power of compound interest!). And also, in order to get a tax refund, remember that you have to actually file your taxes first (I’ve been using TurboTax for the last 5 years they’re great and quite simple). So get on that now and make some smart choices this year regarding your tax refund!