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With the average income tax refund in Canada hovering at $1,641, it’s easy to understand why many Canadians are tempted to spend this once-a-year windfall on travel or consumer goods. Heck, I’ve done that. When I turned 21, I spent my income-tax refund on a trip to Las Vegas! It was fun, but it wasn’t a good use of that money, especially since I was racking up over $38,000 in student loans at the same time.
There is a better way to use your tax refund: to achieve your financial goals. Here are four ways use this money that will better your financial situation.
Pay Down Debt
Personally, I’ve used my income tax refund to pay down debt twice. In 2011, I had $38,000 in student loan and car loan debt, and it felt like I’d never pay it all off. Fortunately, I received two large income tax refunds, and I used them to pay down large swaths of debt in one fell swoop.
Paying down debt is the best thing you can do with your income tax refund. If you choose to go this route, make sure to pay down your highest interest debt first, because that debt is costing you the most money on a day-to-day basis.
After you’ve made your big payment, make sure to recalculate your debt free date to see how much closer to debt freedom you are, which will reinforce that this was a good use of your money.
Start An Emergency Fund
Have you ever lived paycheque-to-paycheque and needed to charge even the smallest unexpected expense to a credit card? I have. But there is a way to avoid this situation entirely, to ensure you’re never caught without a cash cushion again, and that is to develop an emergency fund.
An emergency fund (or “rainy day fund” as some people call it) is there for you when unexpected expenses like car repairs pop up. Instead of putting those emergencies on your credit card, you pull from your cash cushion. An emergency fund helps you stay off the credit card debt treadmill and helps you avoid costly interest charges.
A healthy emergency fund should cover your minimum living expenses for three to six months. But if you are in the midst of paying down your debt, you probably don’t want to put that on hold for several months to build up your emergency fund. If this is the case for you, a smaller emergency fund of $1,000 - $2,000 is enough for a short-term cushion.
An income tax refund can be a great start to an emergency fund. With a $1,641 refund, you could rest easy knowing that you can pay off your consumer debt without worrying about an unexpected expense derailing your progress.
If you've paid off your debt, you should be saving three to six months of living expenses in your emergency fund, and your income tax refund will be a good start to this savings goal.
Save for A Big Purchase or Goal
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 your vacation on your credit card and paying it off after (and possibly incurring interest charges along the way), you save for it leading up to the trip and pay up front.
Using your income tax refund to accomplish your savings goals is a great way to reinforce this healthy financial habit. I save for all of my purchases in advance. Saving in advance is a much healthier, less expensive and less stressful.
Here are some examples of purchases or goals you could try paying for in cash:
Contribute To Your Registered Retirement Savings Plan (RRSP)
Ideally, you are already saving a small amount of your paycheque (between 10 – 15%) for retirement each and every pay period. But I understand, life happens, and if you have other pressing financial priorities, contributing to your retirement may seem like something to worry about in the future.
But no matter how deep in debt you are, you should be saving (at least a little) for retirement. Otherwise, you’ll miss out on valuable compound interest. Using your income tax return to contribute to your RRSP is an excellent way to ensure you are saving for your future without reducing your disposable income.
The opportunity cost is too high to ignore. Let’s look at an example.
Let’s assume you are 25 and you receive the average income tax refund of $1,641 every year. You have debt that you want to pay off, so you decide to use your income tax refund to save for retirement while you focus on debt repayment.
You contribute $1,641 per year to your RRSP for five years and invest that money in a low-cost index fund yielding a 5% return. At age 65 you will have $38,969.57. That’s without adding any additional money after the first five years! If you start to make regular contributions after your debt is paid off, you’ll end up with even more.
Another bonus of contributing to your RRSP is that it lowers your taxable income for the next year, increasing the size of your tax refund next year.
For many Canadians, their income tax refund represents an opportunity to splurge or treat themselves. But for the truly financially savvy, an income tax refund is a chance to achieve their financial goals. Join the financially savvy tribe and use your income tax refund to improve your financial situation. Your wallet will thank you!
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easyfinancial offers a variety of financial services including personal loans, and mortgages. easyfinancial is a division of goeasy Ltd., the leading full service provider of goods and alternative financial services that improve the lives of everyday Canadians. goeasy Ltd. is listed on the TSE under the symbol 'GSY'.
* easyfinancial offers secured personal loans in all provinces, excluding British Columbia, Nunavut, Northwest Territories, and Yukon.
While having a loan and honouring its obligations can help build credit, too many loans may be seen by potential creditors as an increased risk, and failure to meet repayment obligations will result in a negative report to the credit bureaus, which would reduce your credit score. Please borrow responsibly.
Loans from easyfinancial do not automatically renew. Customers have the option to request an increase to their loan after paying down a percentage of their current loan amount and maintaining good payment history. Such a request would be subject to the company's standard underwriting rules.
easyfinancial offers personal loans from $500 to $25,000 with terms from 9 to 120 months. The APR is between 19.99%-46.96%. Secured personal loans may be subject to provincial fees upon funding. NSF (non-sufficient funds) payments will be assessed a $50 fee in addition to fees charged by the customer's financial institution.
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Purposes for Which goeasy Handles Personal Information
goeasy collects and uses personal information for purposes limited to those which are related to its businesses, which include providing financial services and leasing household furnishings, appliances, and home electronic products to its customers under lease agreements. We collect personal information primarily from you, for instance through applications and supporting documentation you provide. We may also collect personal information about you through your ongoing interactions with us, from references, employers and other financial institutions you have identified in your application as well as credit bureaus and other third party sources. For example, we may collect personal information from credit bureaus for the purpose of locating you to collect outstanding debts. In connection with loan agreements, we may also collect personal information from credit bureaus in order to verify your current and ongoing creditworthiness and other information you may provide to us.
We may collect and use personal information for purposes such as, but not limited to, the following:
Personal Information goeasy Collects
goeasy limits the amount and type of personal information collected to that which is necessary for our identified purposes, and we collect personal information by fair and lawful means.
Personal information that we collect includes:
Transfers and Disclosures of Personal Information
goeasy may disclose personal information in a number of circumstances, including:
In addition to the above, personal information may be shared between our affiliates or subsidiaries (including those located in the United States) for internal audit, management, billing or administrative purposes including defending and bringing legal actions.
In the course of fulfilling the purposes described above, goeasy may transfer your personal information to service providers, including affiliates or other third party organizations or individuals retained by goeasy to perform functions on its behalf, such as marketing, data processing, customer service, office, security, collections, insurance, financial and taxation services. When personal information is transferred to service providers, we use contractual or other means to ensure that a comparable level of protection is provided. Some of our service providers may be located outside Canada, including in the United States, and will be subject to applicable legal requirements in the country in which they are located, including lawful requirements to disclose personal information to government authorities in certain circumstances.
goeasy may also use and disclose personal information in connection with the proposed or actual financing, securitization, insuring, sale, assignment or other disposal of all or part of our business or assets (including your loan or lease and any agreement to which it relates), for the purposes of evaluating and/or performing the proposed transaction. Assignees or successors of our business or assets may use and disclose your personal information for similar purposes as those described in this Policy.
goeasy may disclose your personal information as necessary to meet legal, regulatory, insurance, audit, and security requirements, and as otherwise with your consent or as permitted or required by law.
goeasy uses reasonable safeguards and other security standards to protect all personal information in its custody and control against loss or theft, as well as unauthorized access, disclosure, copying, use or modification, regardless of the format in which the information is held. Safeguards will vary depending on the sensitivity, format, location, and storage of the personal information. Only authorized employees, agents, partners and third parties who require access to personal information to fulfill their job requirements will have access to personal information.
Access and Accuracy
goeasy may establish and maintain a file containing an individual's personal information for the purposes described above, which will be accessible at our offices. Individuals have the right to request access to or correction of their personal information that is held by goeasy. Requests must be made in writing, addressed to goeasy's Privacy Officer as per the contact information set out at the end of this Policy. We will respond to written requests within a reasonable time. Copies of records containing personal information may be subject to a fee. If this is the case, goeasy will inform the individual of the amount of the fee in advance. We will use our best efforts to ensure that personal information is as accurate, complete and up-to-date as necessary for the identified purposes. If an individual successfully demonstrates the inaccuracy or incompleteness of personal information, we will amend the information as required. If we refuse access to personal information or disagree with an assertion that information held by us is incorrect, we will provide a written explanation for such refusal and a description of our complaints procedure should an individual decide to challenge such written explanation. An individual's right to access or correct personal information is subject to applicable legal restrictions. To prevent fraudulent access to the personal information stored by goeasy, we may take reasonable steps to verify an individual's identity before granting access or making corrections.
goeasy's Websites and E-Mail Communication
goeasy does not guarantee the confidentiality of any communications made by you via e-mail or otherwise through our websites. If you wish to provide information of a confidential or sensitive nature to easyhome, please contact us directly by telephone at 1-866-823-3279 or easyfinancial at 1-888-502-3279 to arrange for delivery/transmission of such information by secure means.
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We use the data collected through Google Analytics Demographics and Interest Reporting to better understand our website visitors in terms of demographics and interests, to improve our website content in order to cater to our audience, and to customize advertisements based on our audience's interests and demographics.
In certain circumstances, as permitted or required by law, we may collect, use or disclose personal information without the knowledge or consent of the individual. These circumstances include but are not limited to: personal information that is publicly available as defined by regulation; where collection is clearly in the interests of the individual and consent cannot be obtained in a timely way; where disclosure is made for the purposes of collecting a debt owed to us; or to comply with a subpoena, warrant or court order.
Inquiries or Further Information
Privacy Officer, goeasy Ltd.,
33 City Centre Drive, Suite 510
Mississauga, Ontario, L5B 2N5, Canada
If you are not satisfied with our response to a privacy-related matter, you may contact the Office of the Privacy Commissioner of Canada at 1-800-282-1376 or at http://www.privcom.gc.ca. or in Quebec, Alberta or British Columbia, your provincial privacy regulator, as applicable.