Written by Isaac Veeneman, CFP®, BBA, Associate Financial Planner
Receiving a tax refund can feel like free money, and it’s natural to want to enjoy it. Whether you’re thinking about a fresh spring wardrobe or booking a sunny escape, a little self-reward is totally fair. We recommend setting aside a small portion of your refund, up to 20%, for something fun. The rest? That’s where a bit of planning can make a real difference for your financial future. Let’s assume for this guide that you don’t need the refund for essential daily expenses like food, shelter, or transportation. If you do, it might be time to revisit your budget or consider booking a Money Chat with one of our financial experts.
For everyone else, here are five smart questions to ask yourself when considering what to do with a tax refund.
1) Do I have high-interest debt to pay off?
Debt that charges a high interest rate, like credit cards or unsecured personal loans, can make it harder to build savings or invest for the future. Some credit cards charge upwards of 19.99%, and even lower-interest loans often fall in the 6-10% range. Paying down this type of debt is usually one of the most effective ways to strengthen your finances. The cost of carrying it typically outpaces the returns you’d earn from most savings or investment products.
Note: Some mortgages may count as expensive debt, depending on your interest rate and terms. If you’re unsure, connect with your Mortgage Advisor.
2) How much is in my emergency fund — and is it enough?
An emergency fund is one of the best ways to avoid falling into debt when life takes an unexpected turn. While the typical guideline is to save 3-6 months’ worth of expenses, that can feel out of reach for many Canadians. Even setting aside $4,000 or $5,000 as a starter emergency fund can provide peace of mind and a solid financial cushion. If this is something you’re actively working on, your tax refund could give you a strong head start.
Here are some tips to create an emergency fund.
3) What short-term goals are coming up?
If your debt is under control and your emergency savings are in place, it’s time to think ahead — particularly for the next 12-24 months. Are there any big (or small) milestones on the horizon? These might include:
- Renovating or maintaining your home
- Upgrading your vehicle
- Booking a vacation
- Furthering your education, or
- Securing that sought-after collectible online
Goals don’t have to be massive to be meaningful. Planning for the fun stuff can help you stay motivated while managing your money.
4) Can I invest in myself or my business?
Sometimes, the best returns aren’t from the stock market — they come from investing in your own growth. If a tax refund leaves you with some extra cash on hand, you could use that to enhance your skills or credentials, or to expand your business. Whether through a course, certification, or essential equipment, an investment in your earning potential can go a long way.
There are many ways that Coast Capital can help you increase your earning power. Get free access to Coursera, a global platform for online learning and career development, with a Coast Capital Elevate Chequing Account. Coursera provides access to courses and professional certificates from world-class universities and companies, helping you advance your career and potentially get paid more.
5) How can I best put this money to use for the long term?
If you’ve covered your essentials — no high-interest debt, a healthy emergency fund, and no short-term expenses on the horizon — it might be time to think long term. For many Canadians, that often means deciding between putting extra money towards their mortgage, or investing it in their RRSP or TFSA. So, which is the better move?
There are two key factors to consider:
- The financial impact: Do you expect your investments to earn more than your current mortgage interest rate?
- Your comfort with debt and risk: Are you eager to be mortgage-free, or are you okay with some uncertainty in exchange for potential investment growth?
That isn’t always a straightforward decision. For example, if you locked in a low mortgage rate and you’re comfortable with a bit of market fluctuation, investing might offer better long-term growth. On the other hand, if peace of mind comes from reducing debt, putting your refund toward your mortgage could be the right move.
Still can’t decide?
No problem. Our financial experts can help you determine the best option for you. Or, if none of these options apply, we’ll take some time to understand your situation and find the right solutions to help you reach goals. Get in touch.
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This article is provided for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, fees, and other investment factors are subject to change without notice and Cost Capital Savings Federal Credit Union is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and Coast Capital Savings Federal Credit Union does not guarantee accuracy or reliability of such sources. Readers should consult their own professional advisor for specific financial, investment, and tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
Coast Capital Savings Federal Credit Union provides advice and service related to deposit, loan and mortgage products. Coast Capital Wealth Management Ltd, a wholly owned subsidiary of Coast Capital Savings Federal Credit Union, provides investment and financial planning services. Coast Capital Financial Management Ltd., a wholly owned subsidiary of Coast Capital Savings Federal Credit Union, provides advice and service related to insurance, segregated fund contracts, and annuities in Alberta, British Columbia, and Ontario. Worldsource Financial Management Inc. provides advice and service relating to mutual funds.
