Tax time is one of the ‘seasons’ I look forward too. Effective tax planning is another way to ensure that your money is working hard for you. One of the reasons I like tax time is because I always get a refund (so far at least). Now, I know a lot people say that if you get a refund from the government, you’re essentially lending the government money during the year, and they pay it back to you in March-April when it is worth less…because inflation reduces the value of money over time. As much as I understand the logic behind this, it still is pretty nice to get a good chunk of money from the government after 12 months of getting taxed like it’s going out of style.
Much of my tax refund comes from: tuition credits (a plus to getting a lot of education-but should definitely not be a reason for going to school), RRSP contributions (cause my employer does company matching), transit pass (every bit counts), charitable donations (I would do this whether they provided a credit or not).
So what are some ways that you can make your tax refund work overtime for you? Think about it, this is the one time during the year where if you plan it right, you get a chunk a money dumped into your account to do as you please. Make sure you make every penny count. Here are 6 things you can do with your tax refund to make it stretch even further:
(1) Put a Lump Sum Payment Towards Your Student Loan Debt:
I can tell you from experience that if you are serious about paying off your student loan debt, this is one of the quickest ways to do it. It will also give you the motivation you need to tackle the rest…trust me. My husband and I tackled $120,000 of debt ($110,000 from student loans) in exactly 2.5 years. During that time we received a combined refund of slightly over $7,000 each of the two years from the government ($14,000 in total). The entire $14,000 essentially reduced our debt from $120,000 to $106,000 and what a relief that was.
However, that might sound like not a lot but let me show you the numbers. The kicker with student loans is that interest charges accumulate DAILY. For example, the daily interest rate on my $64,000 student loan alone was $7.85 (before I started paying it down…and that was just interest). That’s PER DAY…yah crazy right. Oh and did I mention that includes weekend (the government does not take holidays when it comes to getting paid). Each time my husband and I put in the $7,000 tax refund towards our student loan, it reduced our combined daily interest charge by about $1.70/day or $6,205 over the term of the loan if we took 10 years to pay it off ($1.70 X 365 days X 10 years). Now if you are a numbers person like myself, you might say, why would I put away $7,000 now just to save $6,205 in the future, I could invest that money and get back a lot more? That’s a valid point, but here are my thoughts:
- If your debt is lower than mine and you got a decent refund, your daily interest rate would go down even more, probably saving you more than what you put into it from the refund over the standard 10 year period they give you to pay it off (the years can be increased if requested by you). The higher the debt, the more compound interest worked against us.
- Getting rid of debt gives you peace of mind. Any millennial will tell you that it’s hard to think about much else when you have student loan debt weighing you down
- I am all for investing in the stock market, but putting money in the stock market before you take care of your student debt (or substantially reduce it) can create a lot of problems when the markets go south…like right now.
- By not owing anybody any money, your income can go towards building your wealth faster, instead of paying the piper.
If you are looking to aggressively pay off your student loan debt, and you are expecting a tax refund, you should do this.
(2) Beef up for TFSA contributions
I absolutely love the Tax Free Savings Account. It’s the gift the keeps on giving. One of the biggest mistakes that Canadians make with their TFSA’s is to use the room as their savings account or dump a lot of GIC’s in them. The percentage of Canadians that put GIC’s in their TFSA’s is close to 70% (that’s a lot).
If you’ve paid off your loans, and you are saving for the future, consider using the TFSA to beef up money for your retirement savings. All monies placed in this account can grow TAX FREE. Yes, that means that the government will never touch them. This is why my husband and I use the TFSA room to invest in a balanced portfolio returning higher returns in the long term. Higher than any GIC can give. Keep in mind these savings are for our retirement, which is not for at least another 35 years, so we are willing to take the risks to get ahead financially. Plus, we understand what we are invested in and the risks involved. I would not recommend anyone to invest in anything that they could not easily explain to a 9 year old.
So if you were 18 years of age or older in 2009 and a resident of Canada, you can contribute up to $46,500 to your TFSA account by 2016. All the gains from your investments in these accounts are NEVER TAXED (of course in turn you cannot claim any losses against your tax return). If you have a spouse that is $93,000 of funds between the two of you, and any growth from those funds the government can’t touch. Plus, you get the added bonus of taking the money out at any time if you need it (although I don’t recommend this) without getting penalty tax charges from the government for withdrawing the money before retirement. Of course depending on what you are invested in, you may be charged fees for early withdrawal, but not from the government. If used properly, the TFSA room can be the gift that keeps on giving for your retirement planning. To learn more about the TFSA, check out the Canada Revenue Agency (CRA) website.
(3) Beef up your RRSP contributions
RRSP contributions are another great way to save for retirement, while receiving an immediate tax benefit in the way of a tax refund. If your company does any sort of matching against the RRSP contributions you make, then this is a no brainer. Not taking advantage of RRSP contributions if your company is matching is throwing money away.
However, putting money in an RRSP for retirement may not be the ideal solution for everyone (although it is for many). If you think you will earn more money now than when you retire, then the RRSP may be right for you. Alternatively, if you think you will earn more money during retirement than you earn now, then the RRSP may not be the thing for you. In a subsequent post, I will talk more about this, but for many, putting money in an RRSP is a must, if only just to reduce taxes in the short-term.
My husband and I do a combination of both. Through our employer we contribute the maximum amount they will match, and the remainder we put in a balanced portfolio in our TFSA’s. We currently contribute 30% of our combined take home pay in our TFSA for retirement, but we hope to increase this to 40% as our incomes increases and we find more creative ways to cut costs.
(4) Beef up your emergency fund
If you are out of debt, and you want to keep it that way…you need an emergency fund. Even the most detailed budget cannot foresee an unexpected expense like a major car repair (not regular maintenance & repair), the death of a loved one (flights are expensive) etc.
The general rule is that your emergency fund should cover 3-6 months of your basic living expenses. Your basic living expenses would generally include: housing, transportation, food & utilities. So when crap hits the fan, those 4 items will always need to be covered…because that’s life.
Now I have to admit even I have not saved 6 months’ worth of emergency money to cover these 4 basic expenses. My husband and I are in the process of saving $10,000 towards our emergency fund (currently at $2,500). This $10,000 would cover us for 4.7 months based on our current expenses in these 4 categories. Honestly, I am O.K. with that. We keep this money in a plain vanilla savings account and GIC’s using the GIC laddered strategy.
The idea is, as long as you have something saved (at least $2,000- $3,000 in my opinion), most emergencies wont side swipe you and derail the rest of your financial plans.
Having an emergency fund will give you a lot of peace of mind.
(5) Educate yourself. Learn something that will make (or save) you more money
Let’s face it, school is expensive and when you were a full time post-secondary student, you had definitely paid your dues in terms of the bulk of your formal education. However, if you like learning like I do, consider using some of that money to invest in yourself…and pay cash for it this time. It doesn’t have to be anything too time consuming. An evening course one night a week, or a professional development seminar may do the trick. The idea is to learn about things that interest you and that will hopefully make you more money or save you more money.
I studied accounting in my undergraduate degree, but didn’t really have the practical experience (because university focuses more on theory) of preparing tax returns until I started working. One of the best investments I made was when I took H&R Block’s Tax I course (offered to the general public- I don’t work for them). It was one of the best $350 investments I made. They offered both the theory and the practical experience needed to prepare your returns. This $350 investments has more than paid for itself as I now never have to pay to get my taxes done and pay ridiculous fees to do so. This was almost 7 years ago so the savings is huge. I do my taxes and my husbands. When you’re a student, getting your taxes done at a tax place is affordable, when you start working full time…it gets pricey. Granted you need to know what you’re doing, but if you’re interested in learning the stuff, it doesn’t feel like work.
(6) Pay off consumer debt
Lastly, it might be time to get rid of the high interest rate credit card debt that has been costing you so much in interest each month. That’s the first thing that my husband and I did when we were doing our debt snowball. We cleared our combined consumer debt of about $10,000 mostly from credit cards and line of credit. We did this before we tackled the student loan because the interest rate was killing us.
Tags: a lot of debt, budget, Budgeting, Canadian Revenue Agency, consumer debt, CRA, Credit, credit card debt, Debt, debt snowball, goals, how to use your tax refund, Investing, line of credit debt, modest living, net worth, paying off debt, planning, Registered Retirement Savings Plan, RRSp, RRSP contributions, Savings, student debt, student loan, tax free, Tax Free Savings Account, tax planning, tax refund, tax return, tax season, tax time, TFSA, using your tax refund