Are you one of the lucky ones this year to receive a tax return? Many view these returns like gifts from the government to be spent on long coveted items like a new gadget, toys, or clothes for the summer season. However, your tax return represents an overpayment to the government from your income and the return you get back is really a part of your income.
If we think of tax returns as income, then the way we use our return changes slightly. We can put that money to good use. In many cases, the best use of your tax return is to pay off debts incurred over the year. However, depending on the size of your return and the amount of debt you carry, there are a number of good ways to spend it.
Pay Down Debt
Using your return to erase debt, especially high interest debt, will potentially save you hundreds of dollars throughout the year. This freed up money can then be put to other uses or applied to other debts to help you become debt free quickly. You can also use your tax return to pay down some other debts that might be nagging you, like your student loan or lines of credit. Clearing up these debts, or significantly reducing them, in one payment allows you access to more money throughout the year that you would otherwise be using to service your debts. Also, by making a large dent in your debts, you will be able to be debt free more quickly and improve your credit rating over time.
You may also want to look at your mortgage or auto loans and see if you can make extra payments without penalty. Using your return to help pay down these larger debts has the same effect as paying down your credit cards, you are free from the loan more quickly which, in the long run, will save you in interest costs putting more money in your pocket.
Save
Using your tax return to jumpstart a savings plan is a great idea. It is often suggested that you have 3-6 months of emergency savings built up to cover those large unexpected expenses, like a flooded basement, loss of job, or other unexpected income reduction. Building this savings month to month may be difficult for many people, but with a sizable return, doing so may be a bit easier.
You can also use your return to help build your retirement savings by putting it into an RRSP, if you have the contribution room, or other such long-term savings plan you may use. Putting your return into savings and holding it there for a while also will protect you in case your file has been audited and you have been reassessed. In the case of a reassessment, you may be required to pay back some of your return. By holding it in a savings account, you will be sure that you have the money on hand to pay back if need be instead of having to scrounge up the money out of your budget, which could lead to credit use.
Donate
Using your return to make a charitable donation has two really good side effects. Firstly, you are giving back to the community and supporting a charity that means something to you. Secondly, you are creating tax savings for the next year so that you can again receive a tax return.
Save/Spend
A good balance to consider is setting aside a portion of the return in savings and use the other portion for spending. A 70%/20% split, savings to spending, is a good way to help you build your savings account and get something you have been eyeing. It is important to keep in mind, that if you are spending some and saving some, it doesn’t make sense to buy a $1,000 item on credit because you received a $250 return.
You may also want to consider buying something that will either retain value or maintain what you have. Using your spending portion to pay for home improvements may be a better value than spending frivolously on something that will depreciate quickly over time.
The Credit Counselling Service of Sault Ste. Marie and District is a not-for profit accredited credit counselling agency whose mandate is to educate and counsel the community on issues surrounding money and credit management. For more information about credit counselling services in Sault Ste. Marie, please contact Credit Counselling Services of Sault Ste. Marie & District, 298 Queen Street East, Sault Ste. Marie, ON, P6A 1Y7, visit our website at www.creditcounsellingssm.ca, follow us on Twitter @CC_SSM, or LIKE us on Facebook.
