10 Ways to Use Your Tax Refund
How you spend your tax refund often depends upon your tax bracket and debt profile, explains Forward, and dealing with a licensed financial planner (CFP) can enable you to cut through the noise and distribute it correctly. Here are 10 smart ways to spend your tax refund.
1. Pay off bank card debt
“If you have credit card balances, you may want to go in this direction to get rid of those balances so you don’t end up paying interest that you don’t have to pay,” says Forward. Eliminating or significantly reducing bank card debt along with your tax refund can prevent money in the long term and improve your overall financial health and credit rating.
2. Start an emergency fund
Building an emergency fund along with your tax refund can provide a financial safety net for unexpected expenses and stop you from going into debt during emergencies. Consider a High Interest Savings Account (HISA) on your emergency fund to earn interest in your savings and interest on the interest, often called compound interest. (Check out MoneyDown’s compound interest calculator).
3. Open your first constructing savings account (FHSA)
If owning a house is a future goal for you, organising a First Home Savings Account (FHSA) along with your tax refund can jump-start your journey to homeownership. You’re limited to $8,000 per yr and a maximum of $40,000, but it surely’s a solid first step toward owning your first property that only newbies can profit from.
4. Open a TFSA
If you have not set financial goals yet but still need to be intentional about your tax refund, opening a Tax-Free Savings Account (TFSA) along with your tax refund can enable you to grow your savings tax-free and provide you with flexibility for future financial goals.
5. Make an RRSP contribution
Contributing to an RRSP along with your tax refund can enable you to save for retirement and reduce your taxable income. Still, Forward explains that this selection could also be less vital for those who need the cash sooner or have already got a pension. “A younger person may not be thinking about RRSPs because they have just started their career,” says Forward. “RRSPs make more sense if you’re in the highest tax bracket, and you can get the most bang for your buck.”
6. Make a prepayment in your mortgage
If you may have a mortgage with a prepayment penalty, you should use your CRA tax refund to prepay your mortgage. It goes directly toward your principal balance, allowing you to scale back the overall interest you pay and shorten the term of your mortgage. Most lenders limit the variety of prepayments per yr, but maximizing the prepayments allowed can prevent so much on interest in the long term.
7. Pay off your student loans
If you continue to have remaining student debt, you possibly can reduce your debt load and save on interest payments over time by utilizing your tax refund to repay your student loans. For more suggestions, see Student Financial Aid: How to Pay for School and Live a Life – A Guide for Students and Parents.
