The good and bad of a tax refund

What would you say if I offered to pocket $130 dollars of your money every month, to be repaid annually? I’m good for it; repayment is guaranteed. Oh, I should tell you that I’m not paying any interest on this money.

I imagine that you’d decline. No interest? No thanks.

Well, most of you are already doing this. Rather than lending it to me, you’re giving your interest-free loan to the government. As a taxpayer who benefits from your generosity, I thank you.

The average tax refund in Canada is $1,600. That’s a lot of interest-free money that nice Canadians such as you are giving the government each year.

That refund is not free money, although it’s usually treated that way. That’s why it’s called a refund; it’s a refund of an overpayment of your taxes. (By the way, there is a government form that you can use to reduce your withholding taxes so you’re not over-paying your taxes.)

Choices, choices: Las Vegas or that big-screen TV. Those aren’t the best ways to spend your refund, but it’s found money so why not blow it, right? Instead, why not use that small windfall to pay off credit card debt, buy life or disability insurance, contribute to an emergency fund, make an RRSP or TFSA contribution or contribute to your children’s education fund?

For his book How Rich People Think, author Steve Siebold interviewed 1,200 of the world’s richest people for ideas on how they have amassed wealth and keep it. The wealthy may buy nice things – but they can afford them because they’ve made good financial decisions for decades. This is one of those good financial moves that Siebold touts.

One common objection to making smart moves with your tax refund is that you have to live for today because who knows what the future will bring.  That’s a cop out. Do you have stress in your life because of debts or poor finances? Getting out of debt and getting your financial house in order can have an enormous impact on your enjoyment of life. Imagine how stress relieving it would be if you didn’t have to worry about money.

Let’s look at some ideas for using that tax refund for things that will help you build a financial moat around your family and secure your future.

Pay off debt

If you have non-mortgage debt, particularly on credit cards, paying those off is priority 1. Many people blow money on stuff that adds nothing to their financial well-being while carrying credit card balances at 18 per cent interest.

Protect your family

Having proper insurance to protect your loved ones if something happened to you is also important. What would happen to your family if you died or were injured and unable to work? A disability is probably your greatest risk. A 40-year-old man has only a six-per-cent chance of dying before age 65, but he has a 33-per-cent chance of suffering a disability. For a disability lasting three months or more, the average duration is just under three years. If you have a group plan and think you’re adequately covered, you should review your coverage. There may be serious gaps.

Build your Emergency Fund

Next up may be your emergency fund. I say may be because there are variables that may determine if you should have an emergency fund and how much it should be. If your job is very stable, you’d likely be able to land another one quickly should you lose your job, you have two family incomes, you have no mortgage and you have other sources of liquid cash, your need for an emergency fund is much less. Otherwise, you might be wise to flip that tax refund into an emergency fund.

Sock it away for retirement

How are your retirement savings coming along? Not very well, if you’re an average Canadian. Retirement will be a bleak place for the unprepared and your RRSP and tax-free savings account (TFSA) are great ways of saving for retirement. What about your children’s education savings? Are you putting enough away for this purpose?

I’m OK with blowing money if you can afford it, but if you haven’t taken care of those priorities, you can’t afford to blow that money.

This fine book hits hard and never lets up. It’s written in unfiltered, politically-incorrect language. If you’ve ever dreamed of living the dream, study this book like a scientist.

Written by Wayne Rothe

Wayne Rothe, Certified Financial Planner/Branch Manager, Wayne Rothe & Associates Wealth Management, Manulife Securities Investment Services Inc., [email protected], 780-962-1146, Spruce Grove, Alberta. These comments are the author’s and not necessarily those of Manulife Securities. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

One Response to The good and bad of a tax refund

  1. The good and bad of a tax refund yet on the bottom of your article you talk about

    “This fine book hits hard and never lets up. It’s written in unfiltered, politically-incorrect language. If you’ve ever dreamed of living the dream, study this book like a scientist.”?

    I like the tips about what to do with your tax refund, perhaps putting it into a DRIP as an investment as well?

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