Receiving a tax refund can feel exciting, like winning a mini lottery. But before you take yourself on a shopping spree, you may want to consider some ways to use your tax refund as a smart investment for your financial future. Here are some of the best ways to spend your tax refund.
Pay off Your Credit Card Balance or Loans
Many people get by on making the minimum monthly payments to their credit card, student debt, or other loans. While you might be meeting the requirements of your debtors, maintaining the bare minimum prolongs your term and costs you more money.
Your tax refund can help get you ahead on paying off a credit card balance or loan. As a general rule of thumb, consider paying off your debts with the highest amount of interest first.
Paying down a large chunk at once reduces the amount of interest you have to pay in the future. Making payments ahead of time also shortens the term of a loan and reduces your financial stress.
Start a Savings Fund
Whether your goals are short-term or long-term, having the right savings account is ideal for accumulating funds for your financial future.
RRSPs and RESPs can help you save for longer-term goals of retirement and your child’s education, while a more general TFSA is best suited for shorter-term purposes like a kitchen renovation.
Contributing your money in a savings account will allow you to benefit from accumulating interest. Also, in some cases, your contributions are tax-free or tax-deductible depending on the type of savings account you invest in.
Not sure whether to invest in an RRSP, RESP, or TFSA? We’ve given you a full breakdown in our blog post Knowing the Difference: RRSPs vs. RESPS vs. TFSAs.
Use Your Tax Refund to Invest in Yourself
Not many people think of investing in their knowledge, skills, or education when they receive their tax refund or any lump sum of funds. But making this investment can be a smart decision for long term gains.
Try researching some skills that you think might be helpful at your job or in your business. A small investment in a course, program or software can help you get that promotion, move to a higher paying job, or better operate your business.
Investing in yourself can be a smart addition to your overall financial planning.
Build an Emergency Fund
Most individuals don’t prioritize setting up an emergency fund. But let’s face it – life happens! And when it does, it’s best to be financially prepared for any possibility.
You don’t necessarily have to put your entire tax refund into an emergency fund. However, it would help if you considered putting at least a small portion aside for financial emergencies.
Setting up a “just in case” fund will ensure that you can handle unexpected financial expenditures without going into debt. Your future self will thank you.
Think About What is Important to You
Whether it is paying down your debt, setting money aside for retirement, or even building your emergency fund, the first figure out which goal is most important to you and tackle it first. If you’re not sure where to start, try out Finally. We create a custom financial plan for you to save your money for a successful financial future – all in just a few easy steps!
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