11 Smart Ways to Use Your Tax Refund
11 Smart Ways to Use Your Tax Refund
05.17.2024 - By: Anastasia Barbuzzi
Many of us look forward to receiving a tax refund—about as many who dread having to pay money to the government. Regardless, it's important to understand exactly what this refund represents and how to use it effectively and to your advantage.
Leave your #girlmath mindset here: It's not free money; instead, it's the amount you get back when you've paid more in taxes throughout the year than you were required to.
This overpayment can occur for several reasons, such as excessive payroll deductions, eligible deductions or tax credits, or contributions to plans like an RRSP.
What Is a Tax Refund?
For further explanation: A tax refund occurs when the taxes you paid—through payroll deductions or estimated tax payments—exceed the total tax liability for the year.
Essentially, it means you gave the government a loan, and the refund is your repayment. The difference between what you owe and what you've paid, plus any refundable tax credits you're entitled to, determines your refund amount.
Now for the main event...
11 Smart Ways to Use Your Tax Refund
If you regularly receive a refund and tend to a) blow it right away, b) log on to your banking app to find it vanished over time, or c) always regret not using it more effectively, check out the following ways to smartly use your tax refund.
Plan for large upcoming expenses: Look ahead on your calendar. Do you have any important dates coming up, like a wedding? Are there any planned purchases on your wish list, like a new car? You may have medical or dental bills on the horizon. No matter the expense, take some of the burden of yourself (your regular income) and put your tax refund towards it. It helps take the edge off!
Create an emergency fund: We've discussed this at length, but it's essential to have an emergency fund as a financial safety net during unexpected events such as job loss, medical emergencies, or major repairs. Having an emergency fund will help you avoid high-interest loans or prolonged credit card debt if you can't afford the "emergency." Investing your tax refund in starting an emergency fund can provide peace of mind and financial security when you need it most.
Start an emergency fund for friends and loved ones: I saw someone talk about this on IG recently, and I absolutely love the idea/plan to start one myself. (If gift giving/receiving is your love language, you'll love it too!) Once your priorities and financial goals are taken care of, consider saving your tax refund for when someone in your life could use a hand. Is someone going through a stressful time? Buy them a massage. Did they lose a family member? Get their groceries delivered so they don't have to worry about it. Did their car break down? Order them an Uber! Starting and using this fund is a fantastic tool for building your community and investing in your female friendships.
Save it: If you're tempted to spend your refund when you should be squaring it away, try depositing it in an account where it can grow but remains out of easy reach. And if you need an accountability partner or some extra guidance to prevent you from impulse purchasing, join the 2024 Savings Challenge.
Pay off high-interest debt: Using your tax refund to pay off or reduce high-interest debt that's stressing you out, such as credit card balances, is a financially sound decision. It saves on interest costs and frees up monthly cash flow that previously went towards debt payments— a win-win situation.
Invest for the long-term: Contributing your refund to a Registered Retirement Savings Plan (RRSP) or opening a Tax-Free Savings Account (TFSA) can significantly enhance your savings. For instance, contributing to an RRSP can lower your taxable income, potentially dropping you into a lower tax bracket and increasing your future tax refunds. Meanwhile, a TFSA allows your investments to grow tax-free, providing a flexible saving option without future tax implications on withdrawals.
Fund educational goals: Investing your tax refund in a Registered Education Savings Plan (RESP) is a strategic way to save for a child's future education while benefiting from tax-free growth and government grants like the Canada Education Savings Grant (CESG), which enhances your contributions. Another win-win: it prepares for the financial demands of higher education and optimizes your tax situation.
Plan for a home purchase: Use your tax refund to save towards your first home with the First Home Savings Account (FHSA). Contributions to this account are tax-deductible, potentially lowering your taxable income for the next year and increasing your tax refund while saving towards a significant life milestone.
Pay down your mortgage: Applying your tax refund towards extra mortgage payments can significantly reduce the long-term interest costs of your loan. Making additional payments shortens the term of your mortgage and saves you thousands in interest payments over the life of your loan.
Home improvements: Using your tax refund to make your house into a home is also a great investment, whether you make aesthetic or functional updates. However, replacing old windows or outdated appliances can increase your home's energy efficiency, reduce utility bills, and enhance your property's overall value—not to mention make it more comfortable!
Invest in your health and personal development: The long-term benefits of using your tax refund to improve your overall well-being cannot be understated. The spa day, gym membership, or visit to your therapist are not frivolous— they can make a significant difference, and you deserve it! Using your refund to invest in education or starting something new can also have long-term benefits besides boosting your career prospects or deepening your passion for something. Certain educational expenses may also qualify for tax credits, reducing your tax burden.
Last But Not Least
Reflect on these options, considering your personal financial needs and long-term goals. A tax refund offers an annual opportunity to make strategic financial decisions that provide immediate benefits and contribute to future prosperity. Choose wisely!
P.S: Tap or click here to subscribe and receive a weekly #SundayScroll ☕, my thoughtfully curated newsletter!
Did you like this post or find it helpful? Have any thoughts? Questions? Leave ‘em in the comments below 💚
Not just to help you cope amidst the holiday craziness but also to embark on the "fresh start" or "new season" that back-to-school and autumn inspire.