According to the Canada Revenue Agency the average tax refund in Canada is an estimated $1,506 this year. This money could go a long way towards improving your finances in several areas, depending on how you use it. Here are two financially smart ways to use your tax refund this year to improve your financial outlook:
#1 Pay off debt
According to Bankruptcy Canada, the average Canadian now carries approximately $16,400 in unsecured debt. This means the average Canadian may pay several hundred dollars in debt payments each month, not including their mortgage and car payments. If the total monthly payments for your credit card debts are more than 36 per cent of your net income each month, using your tax refund is a good option to reduce your credit card debt to a more manageable level.
If you decide to pay off debt with your tax refund focus on your credit card debts first. As unsecured debts the monthly payment amount decreases as you decrease the total balance. This means you free up more money in your monthly budget with each debt you pay off. Focus on paying off one debt at a time. If you can use your tax refund to pay off one or two credit cards that’s one to two less bills you have to pay each month. You can then use that extra money to pay off additional credit cards. Experts recommend you either start with your highest interest rates debts first to be the most efficient or you can start with your smallest debts to help build momentum.
#2 Build your savings
Your tax refund money can go a long way towards helping you build your savings. You can put your refund into a savings account to let it accrue with at least a small amount of interest. This provides a financial safety net in case you have an emergency or an unforeseen expense. Experts agree you typically want at least $1,000 in financial padding available in your savings, so you can more than cover that amount using your tax refund.
If you already have a financial savings safety net in place then you may want to consider putting away the money in your RRSP or another kind of savings or financial planning account. You can even put the money into a bond or other investment vehicle for your child(ren) so they can have money in a few years to be used for starting out on their own or going to university.
In many cases more and more Canadians are using their tax refunds to cover everyday expenses, because their income can no longer support their lifestyle. Using your refund cheque to pay everyday expenses is only delaying the inevitable. If possible try to avoid using your refund to pay for incidental expenses. If you do want to use the money to improve your budget, focus on your debts. Paying off even just one debt can help improve your financial situation for every month that follows.
Finally, if even a sizeable tax refund isn’t going to make a dent in your debt load, it may be time to seek help. Consider alternative debt repayment solutions, including enrolling in a debt management program through a credit counselling agency. A debt management program can help you find relief from credit card debt by combining multiple unsecured debts into one, low monthly payment. You can make your debt more manageable with the program and keep your refund cheque to build your savings. By the time next year’s tax refund comes around, you’ll be in a better place financially and be looking forward to a brighter financial future.