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What Should I Do with My Tax Refund?

This time of year, I find that one of the most common questions my clients pose is what they should do with their tax refunds. With so many tempting options like finally taking that long-awaited vacation or taking on some home renovations that are long overdue, it may be difficult to stick to focusing on your long-term financial goals.

In a recent Globe and Mail article, “How to make the best use of tax refund as inflation and interest rates rise”, Alison Macalpine quotes a wealth advisor:

“There are two types of clients. There are the kind who see [a tax refund] as found money and they want to spend it [on] a trip or renovations or whatever they want to do… And then there’s the saving and investing client. Those are the two extremes.”

This year is particularly tricky given the existing economic climate with increased interest rates and inflation causing hits to our investments and spending habits. Macalpine also reports in the article:

“The economic landscape is shifting with inflation at a three-decade high of 6.7 per cent in March and the Bank of Canada raising the policy interest rate to 1 per cent in April – with further increases anticipated.”

So, given the push/pull of the economy and your well-deserved desire to enjoy the tax refund windfall today, how can you achieve some balance? And what’s the best way to use your tax refund to keep you on-track for the future?

A few tips from the Globe and Mail’s article echo some of the advice you may have read here at Lowrie Financial’s blog in “What to Do with Excess Cash?”. These tax refund tips might be helpful to assist you in achieving that balance:

  • Build a buffer with (at least part of) your tax refund. This can allow you to ride out market storms or unforeseen events in everyday life. Emergency borrowing due to lack of preparation can be particularly costly in today’s economic climate.
  • Remember your long-term financial goals to ensure you allocate a significant portion of you tax refund to paying off debts (especially high interest debts). With high inflation and interest rates, it is more important than ever.
  • Focus on long-term benefits from your tax refund – don’t just think short term. Contribute to your RRSP (for additional joy next year) and your TFSA.
  • Think of your kids. A good choice may be to contribute to a RESP to solidify your kids’ future.
  • Revisit your financial plan and retirement strategy – it was put in place for a reason: your long-term financial goals. Unless those goals have changed, it is critical to not over-react to market headlines and trust market resiliency and your financial plan. However, be sure to take a closer look at the interest rate and inflation assumptions used to inform that plan. There may be some tweaking needed.

Although it’s tempting to take your tax refund and splurge on deserved and previously postponed fun today. It’s important to find a balance that takes into account today’s financial wants and needs as well as considering the impact on your retirement and future. 

At the end of the day, a tax refund nothing magical – it’s the same as the money that moves in and out of your household all year long. So, don’t treat is as “found money” that can be squandered, especially in today’s economic climate.

For more tips on keeping focused on your long-term financial goals, wealth building, and retirement planning, check out:

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