Back In 2019,
CIBC did a poll to see how Canadians
were spending their tax refunds
20% of Canadians were using their tax refund
to pay off debt
Another 20% said it would
cover everyday expenses
12% said they would invest the money
And 22% said they didn’t know
what they would do with the money
As the filing deadline for your personal taxes is nearing
you should have filed them by the end of april
And If you owe any tax money to the CRA,
then you want to pay that bill as soon as possible.
But If you’re expecting or have received
a nice tax refund
Then this video is for you!
Because Today I am going to talk about
8 smart ways to spend your tax refund
Hey! Welcome back
This is Thomas
Here to help Canadians make better choices on
Retirement Wealth And Insurance
My goal is to make sure you take home 1 or 2 ideas
And start making better financial decisions today
If you found this video valuable
Please consider subscribing
so you will never miss any of my videos
First of all
Did you know that 63% of people
feel that a tax return is a bonus?
However,
it’s actually your own money
being returned back to you.
So instead of treating your tax return
like found money
It’s smarter to spend it wisely
instead of using it to splurge
The first way to spend your tax return
is to pay off or down any debt
Especially if there is a high interest!
Paying down your debt not only lowers
the amount that you have to pay
But it also lowers the
amount of interest you’ll end up paying
Credit card debt is a great place to start
As they have some of the
highest interest rates at around 20%
Another debt you might consider paying
is your mortgage
Though interest rates are currently really low
You may still want to make
a lump-sum payment on top of
your regular mortgage payments
you’ll need to check your mortgage contract
because there is a cap on how much
you can pay extra to your mortgage per year.
While you might think contributing a small
lump sum may not impact your mortgage
Let me show you an example
If Tom’s mortgage is $300,000
He has an interest rate of 3%
And an amortization period of 30 years.
His monthly payments would be about
$1261.81 per month
Over the 30 year amortization period,
Tom will be making 360 monthly payments
of $1261.81
To pay the $300,000 principal
He would be paying $154,250.84 in interest
For a total of $454,250.84
Now let’s say Tom typically expects
a $1000 return each year on his taxes
And instead of spending it,
he uses it to pay a lump sum
of his mortgage each year
Over the 30 year amortization period,
Tom will only be making 325 monthly payments
instead of the original 360 payments
towards the principal
He would then be paying $137,255.26 in interest
compared to the $154,250.84
That also means now his total amount
that he pays becomes $437,225.26
instead of $454,250.84
If you don’t think $1000 a year
makes a difference to your mortgage,
Think again!
The Government of Canada has a handy
Mortgage Calculator tool on their website
to calculate this
And it will also show you the difference
you can make to your mortgage
Whether you’re contributing one time,
each year or with your regular payment schedule
The second way to spend your tax refund
is to invest it
There are so many ways you can invest it
Such as putting it in to a TFSA
Your RRSP,
RESP,
And these investments can also help you
plan for your long term goals
Like retiring early
Or towards a child’s education!
I’ll go through the options quickly
But I have videos on
each of these investment topics
If you want to learn more about them!
Putting it into a TFSA or
your tax free savings account
is a great place if you think you might
need to use the money in the near future
There is more flexibility in withdrawing it
Than some of the other investment options
But remember
there is a contribution limit to your TFSA
For 2021,
the contribution limit is $6000
Your contributions to a TFSA are
not deductible for income tax purposes
but any amount contributed
and any income earned on the amount
Through investment income
or capital gains is generally tax-free
If one of your financial goals is
to retire by a certain age,
or you like to save more taxes
then you can consider putting your tax return
into the RRSP account.
Especially if your income is in a higher tax bracket.
Which would result in a bigger tax return too!
Another benefit of contributing to your RRSP
is that It helps you grow your investments
tax-free within the account
Until you take it out
If you’re thinking that
you’ll be heavily taxed on it when you take it,
then what’s the point?
Smart investors know,
no matter what,
you have to pay tax at some time.
So it’s either now, later or never.
If tax never is out of the options.
They preferred being taxed later
Instead of now!
Time helps with compounding growth
and allows you to prepare for the bill later
A few things to keep in mind if you want to
contribute to your RRSP with your tax return
Once it’s in there,
it’s recommend not to take it out
until your income has change
Such as retirement,
going back to school or going on a med leave
It is an account for retirement savings after all
However
there are exceptions
like when you buy your first home
Or are using it towards education
Speaking of education
If you have children or nieces or nephews or siblings
who you want to help with their future education
consider a Registered Education Savings Plan
or RESP for short
RESP is the only investment account in canada
that guarantees a 20% return on your investment
Because for every dollar you put into RESP
The government gives you 20%
up to $500 per year
And a maximum of $7200 in a lifetime
If your entire family income is
less than or equal to $47640
The government will give you
an additional $2000 to RESP
So if you have $2500 in tax return every year.
Throw it in the RESP!
Using pre-tax money to attract more
free money without changing your cashflow.
Did you know that the average student debt
is more than $28,000 today
And it takes most students 10 years
to pay them off!
So if you have money
to start saving towards an RESP,
Then it’s best to start as early as possible.
I’ve covered TFSA, RRSP and RESP
in my previous videos
So be sure to check those videos out to learn more.
The next way to spend your tax return is
another form of investment…
Which is Investing in yourself
by learning a new skill!
I am a firm believer of continuous learning
And know that there are both short term
and long term benefits of investing
in yourself through education.
And if you are learning a new skillset
through school in Canada
You will also able to obtain tuition credit tax benefits
which further give you extra tax returns.
Another way of investing in yourself
Is to launch a new business
Do you have a passion project
you’ve been wanting to try?
Many businesses are launched
while people are working their regular 9 to 5
In 2019,
there was a survey
found that 1 in 3 working Canadians
are managing their own side business
More than a third (35%) of working Canadians
were also actively working on
or considering setting up a business
Starting a business from home is easier than ever
Your tax return could go towards buying a domain,
Creating a website,
selling products online,
investing in some inventory and more.
The possibilities are endless
and maybe your side business
Could one day become your full time gig
And there are tax benefits
for those with businesses too
The fifth way to spend your tax refund is
to put it towards your emergency fund
Financial experts suggest that you should have
At least three months’ salary
in your emergency fund
Did you know that in Canada,
2/3 of Canadians do not an emergency fund
of at least three months’ worth of expenses?
2020 has taught us
the importance of an emergency fund
Using the tax return is a smart idea
to put back into the rainy-day fund for future
Another way to spend your tax refund
is to make home improvements
Well,
in the long run,
these improvements can make an impact
in increasing your property value
In the short term,
you may have home improvements that could
Be more energy efficient to save on bills
Some provinces also have
home improvement tax credits too
Also,
don’t forget if you own a property,
you have to pay property tax to our government.
And I am pretty after the pandemic,
the property tax will be going to increase.
So no matter how big or
how small your tax refund are,
you can still put it aside and
contribute to your property.
The seventh way to spend your tax return
is to Give it back to your community.
Like make a donation to a charity.
This is a feel-good way to
contribute to your community
With money that you might
have not been expecting to get back
In 2020 due to the pandemic,
68% of Canadian charities saw
a decline in donations
So as we hope to return normal soon,
try our best to donate more.
Yes it’s a different perspective.
But I believe,
saving money is only a journey.
The end goal is
what can you do with this money.
plus there is also a huge tax benefit
when you donate to eligible organizations.
This is useful Especially when you have
a huge capital gain coming up
like selling your 2nd property or
receive a huge bonus.
Finally,
the last way to use your tax return
is to spend it on something you like
While this way might not provide a financial return,
But if that makes you happy,
then it’s worth it.
Once you are happy,
you will have motivation to work more
and result in a positive cycle.
My suggestion is after you pay yourself first,
and know exactly what you can do with the money.
It’s well worth it.
For example,
I am planning to use my tax refund money
to buy a bicycle
I don’t have to be stuck at home and gain weight.
How do you plan to spend your tax return?
Hopefully this video gave you some ideas to consider
Make sure you file your tax on time.
Usually once you do that,
you can typically expect within 2 weeks
If you have any questions,
please leave them in the comments below!
This is Thomas and I’ll see you next time