Whether you do your taxes yourself or pay a professional the big moment of anticipation comes when you find out that you are getting a refund!
The biggest mistake that I see people make when they get an unexpected lump sum is to put it all on debt right away or just use it all as “fun” money. EVERYTHING IN MODERATION!
See below for 5 smart ways you can spend you tax refund. (Keep in mind this is a guide, depending on the amount of your refund, your personal circumstances you may have different options or choices available to you!)
- 10% PAY – YOURSELF SOME FUN MONEY- For some reason taxes are a huge emotional rollercoaster for most people. If you don’t take any money for yourself most people turn into the “bitter betty” that they paid all year and then had nothing to show for it. I recommend you take 10% of your refund and spend it on yourself. (Guilt free spending for all the Mom’s out there that think buying something for your kids is buying for yourself.. YES I’M TALKING TO YOU!!!)Even if you refund is only $50 that is $5 for you for a coffee or something else small that brings you joy!
- 20% – INVEST- Now that you have paid yourself keep up the good work and take the next 10% and invest it! Whether you choose a TSFA, RRSP, Stocks or just a plain old savings account put some money away for your future! Your future self with thank you, after all compound interest over time is your best friend!
- 45% – DEBT REPAYMENT – Now if you don’t have debt, Congrats! Take this portion and invest it, save it, whatever works for you! If you are among the 75% of Canadians with household debt, prioritize how much of the refund should go towards debt repayment. When I work with a client we prioritize their debt repayment in a few different ways. I quite often like to use this debt repayment calculatorThe calculator gives you the option to know what you will pay in interest over time depending on what order you want to repay the debts. If you have any questions about the calculator please don’t hesitate to contact me!
- 5% – DONATE – I firmly believe that money is part of the cycle of giving and receiving. You are getting a refund, which means you didn’t have to pay and you have something to be thankful for! There are millions of people struggling in this world, give back a little and donate 5% of your refund to the charity of your choice (NO YOUR BANK ACCOUNT DOES NOT COUNT) The best part is that you will get a tax deductible receipt for next year which puts you closer to getting a refund again next year! It is a win/win!
- 20% – SAVE – Now this savings is for either an emergency fund (Do you have one?) or for the ‘NEXT BIG THING’. If you have insurance coming due in another few months, you need some auto repairs, you have a holiday planned… whatever the upcoming expense might be start putting a bit away towards that next “BIG” item. It takes the bite out of the bill down the road which is a good feeling all around!
If you received $1000 in a tax refund
$100 – 10% Fun Money – Guilt Free Spending
$200 – 20% Invest
$450 – 45% Debt Repayment
$50 – 5% Donate
$200 – 20% Savings (The Next BIG Thing or Emergency Fund)
$1000 Total Refund
Now if you only receive $100 the same formula can apply. This is just a guide, you have to do what you feel is right and what works for you!
If you have to pay this year take a few steps to reduce the negative feelings for next year.
Here are some ideas:
- Make more donations
- Contribute more to your RRSP
- Have your employer take more tax off
- Speak with a professional accountant to see if there are more ways you can reduce the amount of tax you pay or if you missed a deduction.
- Start a savings account and put automatic payments into that account so you have the cash for the taxes when they are due next year.
If you or someone you know is tired of struggling financially, needs help making a budget or want to reduce financial stress message or call for a free consultation.