The CRA starts processing tax returns about the middle of February, so if you filed your tax return early, your tax refund probably somewhere in the works. You could see a cheque relatively soon. But have you decided what you will do with your tax refund? Here are some of the more popular uses for a tax return:
Pay for Something You Want Done
Many people use a tax refund as a way to pay for expensive things they want done. Whether it’s replacing carpet, upgrading the heating system in your home, or renovating the kitchen, a tax refund can get you well on your way. If you have been planning to make some changes to your home, your tax refund can be just the capital you need.
Buy Something Fun
Others want to buy something fun. A new laptop might be in order. A tax refund can make a pretty decent down payment on a car. Or, you could go on vacation. There are plenty of people who are interested in purchasing something fun with money that they see as a “windfall.” It feels like extra money, so it seems like spending it on something unnecessary is the way to go.
Save it for a Rainy Day
The more practically-minded are likely to save a tax refund for a rainy day. Boost your emergency fund with the money you get back. Put it in your car repair fund, or put it toward a bigger savings goal you might have, such as buying a house. You could also boost your RRSP contribution. A little extra now can go a long way once compound interest gets involved.
Pay Down Debt
If you have debt, the best use of your tax refund is probably to pay down debt. Debt is a serious drain on your wealth. You continually pay interest to someone else, and your resources aren’t entirely your own. Your tax refund can help you take a big bite out of your debt, saving you money now and in the future.
Do You Even Need a Tax Refund?
One of the questions that comes up, though, is whether or not you really even need a tax refund. I’ve written before that it’s fairly pointless to receive a tax refund. This is because when you have a tax refund, it usually means that you have been over-paying throughout the year. As a result, the government has been enjoying an interest-free loan. Unless you are eligible for a large amount of deductions and credits, the money you are getting back is really your own.
Instead of being used by the government throughout the year, that money could have been used for you, earning interest. You could have been using the money to make more money, rather than letting it sit in government coffers.
Of course, the other side is that some folks like to use a tax refund as a forced savings vehicle. It’s pretty automatic, so it results in savings that add up, and can then be used at tax refund time. But it’s still worth considering whether you even need the tax refund.