3 Things You Should Do With Your Tax Return This Year
It’s tax time, and almost everyone I’ve spoken with in the past few months is excited to receive a refund from the government… myself included. And while some see this money as a windfall that they can spend how they please, I’d challenge you to find a better use for your tax refund.
By treating your refund like free money you aren’t unlocking its value. Your refund is part of your paycheque, and at the end of the day if you’re receiving one it’s because you’ve overpaid your taxes. Your refund is a byproduct of your hard earned money and it is money you’ve lent to the government, interest-free!
Each month taxes are deducted off your paycheque and remitted to the Canada Revenue Agency. At the end of the year when you file your return you are correcting exactly what you paid to the government with the amount you actually owe – in most cases, people overpay on taxes. If you had received an extra $100 on each paycheque would you spend it frivolously throughout the year? The answer is likely no which is why you shouldn’t treat your tax return of potentially thousands of dollars as free money either.
Instead of spending your return on frivolous things, think of it as an easy way to get ahead and grow your wealth.
1) Invest your tax return:
You work hard for your money, so why not have your money work hard for you? This is a great way to get a head start on your RRSP or TFSA contributions for the year.
2) Pay off debt:
No one likes being in debt, so using your refund as a means to decrease that balance is perfectly acceptable and incredibly responsible.
3) Save for a major purchase:
Maybe you’re saving for a home, car, or you’re planning on going back to school. Taking your refund and putting it towards a long term goal is a great use of this money.
If you reap the rewards by investing and paying down your debts, imagine how much money you’d be able to put away if you always invested your tax returns. Invest $1,500 a year for 30 years at 5% return and you’ll have over $100,000 to your name.
If you have regular deductible expenses (such as RRSP contributions or child care expenses) you might want to consider filing a T1213-15e with Revenue Canada and your employer. It allows you to have less tax deducted off your paycheque each month meaning you can invest it and take advantage of compound interest on a monthly basis! Over a lifetime, that compounding can add up.
But if you aren’t sure what your regular tax-deductible expenses will be, just focus on what to do with your return this year. Contributing to a tax-deferred account such as an RRSP or a tax-free account like a TFSA will allow you to build your wealth from the ground up. Start this year in building these financially healthy habits and they’ll go a long way.
If you’re uncertain how to start tax-advantaged investing speaking with a CI Direct Investing financial advisor might be just what you need to get started. Click here to signup and start creating your plan today.
Janine Rogan is a tax specialist and the blog author of My Pennies, My Thoughts, a Canadian personal finance blog with the aim of helping her readers ‘grow their money tree.’ Follow her on twitter: @apenny4athought