If you’ve received or anticipate receiving an income tax refund, you might be unsure about how to manage your “newfound funds.” In some cases, you may receive a refund of a few extra thousand dollars, so it’s important to allocate it wisely in a way that can benefit you for years to come.
You might agree that re-investing your tax refund into a retirement savings accounts (i.e. 401(k), IRA, RRSP, TFSA) is a prudent thing to do, and we certainly think it’s worth consideration. If you’re looking for alternative or supplementary options, however, there are many ways to maximize your refund, so plan ahead and choose wisely.
Top up your emergency fund
It’s generally advisable to save enough money to get you through several months of unforeseen unemployment. Whether this works out to $5,000, $10,000 or even more, having a topped up emergency or ‘rainy day’ fund will help you get through these challenging periods without a major financial hit. Set a goal for how much you’d like to save in your fund, and save regularly to get there. Your tax refund can help you get there faster or even top it off if you have a small portion left to save.
Pay down your mortgage
Some banks allow mortgage holders to pay down a set percentage of their balance each year without penalty. It’s a great way to reduce overall debt, save on interest charges and pay off your mortgage faster.
Do a renovation
If you’ve been talking about remodeling your bathroom for what seems like forever, now could be the time to do it. Renovations often add to your home’s value, so not only will you enjoy your new living space(s), but you’ll likely be able to snag a better selling price when the time comes for you to sell your property.
Allocate a portion to fun
It doesn’t have to be all business. Discretionary spending is okay, as long as it’s balanced with a solid financial strategy of saving and investing for the future. It’s okay to spend the money on fun activities or new items that you want, but keep it contained by allocating a percentage of your refund to fun. Think about the things you value the most, whether it is new clothing, dining out at the trendiest restaurant, or new sports gear. After all, we deserve a little pampering.
Make a charitable donation
Give back to your favorite cause by donating a lump sum to the charity of your choice. The bonus? Donations may be tax-deductible, so the donation could contribute to your refund next year. Visit your government website to determine the tax rate applicable to your region and start donating.
Managing your money requires a roadmap, and that means setting goals, deciding between your wants and your needs, and creating a plan to get yourself there. Lump sums like annual bonuses and tax refunds are an excellent way to get to your goals faster, but only if you plan carefully. Once you have an idea of how much you will receive, start planning and allocating to ensure your funds can best serve your needs – both now and for years to come.
Disclaimer: The text above is for informational purposes only; it is not intended to be a substitute for professional advice. Foresters Financial and its representatives does not provide legal, tax or estate advice.
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