✔The average income tax refund for Canadians in 2020 was $1,849, with almost 20 million getting some sort of refund
✔Use your refund to reach some of your financial goals in 2021, without affecting your day-to-day budget
✔You can use your refund to: pay down debt, save up for a rainy day, help pay for larger purchases or contribute more to your retirement
Most of us don’t receive regular windfalls so, when we do, it’s good to have a plan to what to do with that extra money. The average income tax refund Canadians got in 2020 (for 2019) was $1,849 with almost 20 million getting some sort of money back from the government. That’s money you can put to good use! Here are 4 ways you might want to use that tax refund this year.
Use your tax refund to pay down debt
Paying down debt is one of the best things you can do with your income tax refund because it can save you a lot in interest and a lump-sum payment can help improve your credit score. One good strategy is to pay down your highest interest debt first. Another is to make an extra payment on a mortgage if you have one – just one extra payment a year can save you many thousands of dollars over the life of your mortgage.
Save your tax refund for a rainy day
One thing the COVID-19 pandemic has taught us is how uncertain the future can be. An emergency fund is there for you when unexpected expenses such as emergency home repairs or job loss come up. Instead of putting those emergencies on your credit card or getting further into debt, you pull from your cash reserve. A good tip is to put this money in a separate account so you’re not as tempted to spend it.
Over 8 million Canadians filed an application for the Canada Emergency Response Benefit (CERB). If you were laid off as a result of COVID-19, the CERB funds are taxable income that may affect next year's return.
Learn more about how to prepare for your 2021 income tax filing if you’ve collected CERB here.
An emergency fund is there for you when unexpected expenses such as emergency home repairs come up. Instead of putting those emergencies on your credit card or getting further into debt, you pull from your cash reserve. A good tip is to put this money in a separate account so you’re not as tempted to spend it.
Use your tax refund to help pay for a larger purchase
An excellent way to get out of the habit of credit card debt is to start saving for your major goals in advance and paying for them with cash. That means instead of putting a vacation or new furniture on your credit card and paying it off after, you can pay for it right away and save interest.
Put your tax refund towards retirement savings
When we're focused on paying for day-to-day expenses, it can be a challenge to save for the future. Many Canadians are not saving enough for retirement. A tax refund is money that is probably not part of your monthly budget, so you can put it to good use without affecting your expenses. If you put $1,000 from your tax return into an RRSP (Registered Retirement Savings Plan) every year that yields a 5% return, you’d have more than $34,000 in 20 years.
While retirement might seem far off, the earlier you start saving for it, the more you’ll gain in compound interest. If you're starting to think about saving for retirement, here is some more information about saving for the future with an RRSP or TFSA.
For many Canadians, their income tax refund represents an opportunity get ahead with some of their financial goals. Use yours wisely!
You might also like:
- How to plan ahead for your 2020 income tax filing if you’ve collected CERB
- Ease the Financial Stress of COVID-19 with an Emergency Budget
- The 50-30-20 Rule and How You Can Use it to Guide Your Financial Planning