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What to do with Your Tax Refund?

25 February 2013

It’s hard to be in the middle of gathering all your tax paperwork and figuring out what your deductions and income were for the year, and not start to think about that big refund that (hopefully) you’re getting. And it’s hard to think about that big refund, and not think about what you’re going to do with it. So this year, are you going to blow all that “found money” on niceties and luxuries? Or do you want to be smart with it, and give yourself a leg up for the coming year, and following years? If you want to do the latter this time around, here are a few of the wisest things you can do with your tax refund.

  • It’s no secret that Canadian debt levels are soaring right now, with the average Canadian spending $1.63 for every $1 that they make. Taking your tax refund and applying it towards that debt can be a great way to get your own debt down sooner, and spend less on it towards interest over the entire life of the debt.
  • Pay back RRSPs. If you withdrew RRSPs for the First Time Home Buyer’s Plan, or for any other reason that states you must pay it back within a certain period of time, you should be using your tax refund to do it. Even if it was recently and you’re still in that three or four month grace period, remember that interest is still piling up, so it’s best to get this debt paid off right away as well.
  • Contribute to your RRSP. If you don’t need to pay any money back to this fund, but want to avoid the panic next year that you felt this tax season, use your tax refund to contribute to your RRSP. You’ll give yourself a boost for next year’s tax time, and can feel good knowing that you’ve put your tax refund to good use.
  • Put money towards your mortgage. A lump sum payment can take thousands of dollars in interest off your home loan, and will have you mortgage (and debt) free even faster. Make sure you check with your lender first to ensure that any lump sum payment penalties will still make it worthwhile, and then gain more equity in your home!

Of course these are just a few of the very smart ways to use your tax refund, but chances are you have a few in your own personal life that you could probably come up, such as putting the money towards insurance or car payments. The important thing to remember is that tax refunds provide an opportunity to get things back on track, or just give yourself a financial boost for the coming years.

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