Tax Refund? 5 Things to do with it

Over the next couple of weeks the Kelowna economy will receive a boost as many receive their tax refunds.

For many the plans are being made right now to, go on vacation, buy new living room furniture or treat the family to nice dinner out.

But before you cash that cheque you may want to consider these 5 financial suggestions that could make your financial life better today and in future.

1. Top Up Your Emergency Fund

If you have dipped into your emergency fund this year to handle a family crisis your refund is an easy way to bring the balance back up. The reccomended amount available in your fund is at least the equivilant of 3 months after tax income in cash. Things are getting tighter financially right now, and a well funded emergency fund will give you peace of mind.

2. Pay Off Your High Interest Debt

Do currently own money on a department store credit card, Mastercard/Visa or a personal life of credit? You should look to paying this off next.

According to Canada's Office of Consumer and Corporate Affairs Cost of Borrowing Calculator a 5,000 dollar balance on a department store charging 18% interest and paying only 3% each month the interest cost is whopping $ 4,718 ( assuming you don't you use the card again). That is a 95% market up on your original purchase price of 5,000.*

Not only do you save interest, you also free up monthly cash flow for other priorities.

3. Pay Extra on Your Mortgage

Nothing new here. Using your tax refund to pay off your mortgage sooner has been suggested by financial professionals for years, yet many don't do it. Why? Many, I think don't realize how much a lump sum will really save them.

Using Mackenzie Financial's Mortgage and Loan Amortization Scheduler the difference between owing 300,000 over 25 years at 5% paying 1745 a month and 295,000 is more than 16.500 saved in interest costs.*

Keep in mind the calculator is just an estimate. We don't really know what future interest rates will be, so your actual savings could be more or less.

4. Contribute to Your Retirement Savings Account

What kind of financial professional would I be if I did not encourage you put your refund into your RRSP. Then you can deduct the contribution from your income next year. ( So now you get a tax benefit on a tax benefit.)

On top of that you get tax deferred growth. Over 25 years a one time contribution growing at 8% would add more than 34,000 to your RRSP. Of course you will have to pay tax on withdrawal, but a 29,000 profit inside the account makes it all worthwhile.*

Try Mackenzie Financial's Investment and Regular Deposit Calculator for yourself.

5. Contribute to Your TFSA

Finally use your tax refund to contribute to your Tax Free Savings Account. You can invest as you choose, and the interest, dividends and capital gains are not impacted by the taxman. The future value used above the RRSP is the same, just you don't have to pay taxes on withdrawal.

Great place to put your emergency fund, if your income is low or if you have maxed out on your RRSP contributions.

Now the question is ... which strategy is best for you? Call your financial professional and have them do a comprehensive current financial situation and the impact of each. From there you can decided which option(s) you prefer.

Oh, and by the way I am not suggesting that some of the proceeds cannot go towards a well earned vacation, new couch or dinner out. Maybe you can split the tax refund, half toward your financial goals and half toward some fun.

Mike Hassard Kelowna

Mike's math can be found here*

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