In some respects, receiving a tax refund almost seems like Christmas or a birthday – a once a year event that can be a welcomed and an exciting time for many of us. I admit, I feel this way and always think about the many different ways I can spend this income. Obviously, this depends on the amount one receives, however it typically is a nice sum of money that can be put to good use.
How will you choose to spend this money -will you splurge on something fun -a tropical vacation, perhaps? OR will you decide to use it to help lessen your bills and debt accumulation?
In order to make the best decision possible, I have decided to take a closer look at how tax refunds can be used, as well as some of the stronger arguments for dealing with certain financial obligations, that continue to grow.
What many Canadians do with their Tax Refund money?
On average, I found through various readings, that while some Canadians choose to spend their tax refunds on new electronics, such as a TV, some use this money to put towards travel plans as well as when making home repairs and renovations. Another percentage of this group, puts the additional income towards various investment opportunities. Out of this group, I learned that on average, at least one third decided to pay of loans and other debts versus spending on non-essential items and trips.
This information was definitely good food-for-thought for us and made me think more carefully about how to allocate this money. If we do choose to invest it or pay off a size-able chunk of our loan – then we are likely to be in a better position down the road. At this put, I decided to look more intently at the list of reasons why paying off your debt with your tax refund, will be more beneficial than other avenues.
Top 3 Reasons for Using Income Tax Refunds to Pay off Debts
1) Pay Down High Interest Loans
If you have one or more high interest loan or credit card, you are likely paying a lot of money towards interest each month. It may be a good idea to use some or all of your tax refund to pay down the principal balance on the various credit areas, you currently posses. This way, you have the opportunity to lower the amount of interest charges you have to pay each month and over the course of the year too.
Again, depending on how much income you receive, you can decide how best to pay down your various debts. You can also pay down some of the smaller ones all at once and get them out of the way – freeing up some extra income for your pocket as well as some that can be used to pay off the larger credit levels. Once you have paid off some of your debts, that can be a great motivation to continue on this path and keep you focused on paying off your debts with some consistency.
2) One Chance Per Year to Make Additional Payments towards Bad Debt
Since your tax refund only arrives once a year, this may be the only opportunity you have to make a dint in your debt pile, as well as giving you the jump start you need to improve your financial situation. Using this yearly refund to pay off your debts, instead of falling behind further for perhaps even another year could be highly advantageous in deed.
3) Save more
You may be a bit surprised that I’m thinking of taking my tax return funds and applying them to savings. Most people would think that it would be better to take the funds and place them solely against my debt. For the most part, that’s true & I plan to put the money towards my debt first and foremost. However, I also think that I need to get into a better habit of saving. So, although I didn’t contribute too much to my RRSPs prior to filing my return, I’m thinking a RRSP or tax-free savings account may help me out for the future. My strategy is this – I’m thinking that whenever I get some extra money – whether it’s a portion of my tax refund, birthday money or any other expected sources of funds, I’ll put them into a tax-sheltered saving instrument. This way it will start building up some funds that I didn’t expect to have in the first place.
Although it is certainty tempting to spend the refund on something more luxurious, or even to renovate our home – I think being a little more practical this time around is the better move for us.
For now – we stay focused on our financial plan – and can visit the tropics in our dreams