Did you get a tax refund this year? If so, you may want to think twice about a spending spree. There are several ways to use that money that will help you more in the long run - like paying off outstanding debt or building up your savings.
Here are 5 ways to make your tax refund work for you:
1. Create an emergency fund
After 2020, everyone knows how important it is to have savings set aside in case of an emergency. If you don’t already have enough savings set aside to cover six months of living expenses, start building up a fund now. This goes a long way to relieving stress if you lose your job, are unable to work due to illness, or suddenly have big expenses - like home repairs, medical costs, car accidents, etc.
Not sure how to get started? Try our High Interest Savings Account (HISA)
2. Pay off your credit card
Credit card debt is pretty common. That said, it carries a higher interest rate than many other borrowing options, so it’s generally best to pay off your balance as soon as you can. If you are carrying some credit card debt, consider using your tax refund to pay it down. It could save you a lot in interest.
3. Pay down your mortgage
If your mortgage comes with prepayment privileges you can make extra payments without penalty, helping you pay your mortgage off faster. Using your tax refund to pay down the principal on your mortgage save you money because as the principal shrinks, so does the amount of interest you owe. In fact, if you make a $1,000 prepayment on a $200,000 mortgage with a 4% interest rate and 25-year amortization, that would save you about $602 in interest over your 5-year term, and even more over the course of the mortgage.
Want to run the numbers yourself? Try our mortgage payment calculator
4. Make an early RRSP contribution
Were you scrambling to make an RRSP contribution before tax season this year? Now that you have some money from your tax refund, you can make a contribution early. It’ll save you some stress later, and as an added bonus, your money can start earning now.
Don’t have an RRSP yet? Now’s the perfect time to get one
5. Boost your child’s education savings
If you’re putting money aside for a child’s post-secondary education, your tax refund is a great way to boost those savings. Open an RESP (Registered Education Savings Plan) so that your child can qualify for the Canada Education Savings Grant (CESG), which will immediately give your contribution a 20% boost. Your child will need a Social Insurance Number (SIN) to qualify, and depending on your family financial situation and home province or territory, your plan may be eligible for additional financial assistance.
Not sure where to get started?
A little extra advice never hurt anyone. Decide on the best way to use your tax refund by talking to a Meridian advisor
A previous version of this post was published March 8, 2019.