Usually, when people receive their tax refunds, it is like getting an additional amount of money, and one may feel like buying something flashy or fancy. On the other hand, the utilization of your tax return has potential benefits for your financial situation in the future. In this article you will learn about the 5 intelligent strategies for spending your tax refund in Canada.
Consider these 5 smart ways to use your tax refund in Canada
- Pay down debt
One of the best things you can do with your tax return is to free yourself from high interest charges on debt. Payday loans, credit card balances, and other forms of debt with high interest rates are very problematic if not handled well. All in all, if you can use the money from your tax refund to pay off or at least reduce these debts, you can save a considerable amount of money in the long run on interest charges alone.
Why it’s smart:
- Interest savings: High interest debt can earn interest at rates of 20% or more in some cases. Paying off this loan could save you hundreds or even thousands of dollars in interest.
- Better credit score: Debt repayment is one way of increasing credit score that can assist someone to get loans and credit with better interest rates in future.
- Less financial stress: When you have less debts to pay, you are likely to have fewer monthly payments and thereby have a happy life in general and less stressed financially.
- Contribute to a registered retirement savings plan (RRSP)
Investing in the future is never a bad idea, and in the case of Canada, an RRSP is perhaps one of the most effective means of doing this. An RRSP not only assists in saving for retirement but also provides an opportunity to secure tax benefits immediately.
Why it’s smart:
- Tax deduction: If you invest in an RRSP, you can deduct the amount you put in from your taxes, which results in lower taxes for you. This might mean that you get a bigger tax refund next year. ”
- Tax-deferred growth: Money that is put into an RRSP earns interest and is not taxed until the money is withdrawn. This helps you earn more interest on your money as time progresses.
- Retirement security: A good RRSP can ensure that you have adequate money in retirement that you do not have to depend on government checks and other forms of revenues.
- Invest in a tax-free savings account (TFSA)
Another great way to invest in Canada that allows your money to grow tax-free is through an investment in a TFSA. It is important not to confuse it with an RRSP because the payments made to a TFSA are not tax-deductible. However, it is tax-free when making withdrawals thus making it an ideal form of saving.
Why it’s smart:
- Tax-free growth: Contributions to a TFSA are not taxed, which means that taxes cannot reduce the contribution of money in a Tax-Free savings account.
- Withdrawal flexibility: Money deposited in TFSA can be withdrawn at any time and this will not attract any penalty. This makes it an excellent method to use for both short and long-term savings.
- No impact on benefits: While funds pulled out of a TFSA do not disqualify you from receiving government income-tested benefits and credits, funds sourced from an RRSP do.
- Build or boost an emergency fund
You should understand that an emergency fund is an important part of being financially stable. Emergency fund is a money saved in a savings account that can be used to pay for some unexpected expenses such as health issues, car breakdown, or even job loss without the need to borrow money through credit cards or any other loans.
Why it’s smart:
- Financial security: An emergency fund can help you avoid taking a loan in case there is an emergency that requires you to pay for something.
- Peace of mind: Having cash on hand can make you feel less anxious or anxious about what lies ahead.
- Financial flexibility: It enables you to handle uncertainties in life without putting much focus on your strategic financial goals and objectives.
- Invest in your education or career development
In the long run, an investment on the self proves to be one of the most lucrative investments an individual can make. The best way to use your tax return is to spend it on more schooling, professional certifications, or skill development to get a better job and earn more money.
Why it’s smart:
- Higher earning potential: Attending more school and getting those certifications can help you land better jobs and earn more money.
- Career advancement: Education enables you to fetch a job and provides you more opportunities to get promoted.
- Personal fulfillment: Investing in schooling and growth can also lead to happiness on the job and outside the workplace.
Additional consideration
Consult a financial advisor
You could consult personal tax services Calgary when deciding on how to spend the tax refund. They can assist you to have a view on your options and make the right decisions that will fit your objective and financial plan.
In conclusion
You can actually get some extra cash when you file for a tax return and if you manage this money properly, it will benefit you. Being wise when spending your tax refund money is a good way to enhance your financial position and or achieve your financial objectives.
For instance, you could opt to pay off some debt, contribute to your RRSP or TFSA, create an emergency fund, or fund your education. The tips mentioned above will help you get the maximum out of the tax refund and ensure that you have money in the future if you take time and plan.