6 Options To Help Decide How to Spend Your Tax Refund

It is that time of year again!  Hopefully, you have filed your income tax return on time and are now waiting for your income tax refund. So what do you do with the refund when you receive it that will truly improve your life?

There is a long list of ways to use your income tax refund, many of which offer both financial and mental health benefits:

•    Pay down debt
•    Start an emergency fund
•    Invest
•    Improve your home
•    Donate to a charity
•    Treat yourself

Your income tax refund is NOT new-found money. It is money that you have been lending to the government for the past 12-16 months.

When considering what to do with your income tax refund, the decision comes down to understanding yourself and your needs versus wants.

It would be great to treat ourselves - that's why we call it a treat! But depending on your financial situation that could be piling on long-term stress for short-term distraction. Maybe the best way to answer this question is to consider the options available to you in the context of the return that you expect to receive, remembering that there are both financial and mental health benefits to each option.

Option 1 - Pay down debt

Using your income tax refund to pay off a debt with an 18% interest rate is like earning 18% on your investments.  This option will have short and long-term financial benefits by reducing the amount of interest paid on debt, which makes more money available for other short and long-term goals.  This option will also have short and long-term mental health benefits of reducing the stress of worrying about paying the debt. 

Option 2 - Start or increase your Emergency Fund

Having an emergency fund can have both short and long-term financial benefits. If an unexpected cost arises, your emergency fund would cover some or all of the cost. This will also significantly reduce the stress associated with those unexpected costs and benefit your mental health.

Option 3 - Invest

You could invest in a tax-free saving account (TFSA), RRSP or RESP to get a head start on retirement or child education objectives. Your investments can also act as the emergency fund discussed above. 

If you have high-interest debts, your best return will be from paying those down. Once that is done, then start investing.  Being in a position to save money to achieve long-term financial goals provides great peace of mind benefiting your mental health.  

Also, consider the need versus want equation; if you are spending money on wants when you have debt stresses, you are not doing anything to improve your financial or mental well-being.

Option 4 – Home improvement

We all have a list of things we want to fix or improve around our house and smart investments can increase the value of our real estate. Plan for the big-ticket necessary things (roof repair, window replacement, furnace replacement). Putting aside money to deal with these needs will reduce your stress.  

Also, before considering the wants (pool, outdoor toys, media room, etc.), make sure you have the needs under control and budgeted for.  Not needing to borrow (or borrow less) to cover the needs will reduce your stress and improve your overall financial situation.

Option 5 - Donate to charity

Even if we have a need to invest in ourselves through paying down debt, increasing our emergency fund, etc., we often have charities or causes that deserve support.  Financial donations are often the way to go, but you can also donate your time and labour. Either way, you will be comforted with the knowledge that you are helping others and that's good for everyone. 

There is always a “however”.  Making financial donations that render you unable to cover your basic needs does not make sense. Donations of money should be made when you can afford to do so; otherwise, consider how you can help without putting yourself in a more stressful situation.

Option 6 - Treat yourself

When you are considering all the facts, your mental health plays a big part in your success. We cannot forget to reward ourselves; even the strictest diets allow for a little self-indulgence. Whether it is a dinner out with friends or family, or a special item, reward yourself reasonably. Balance is the key here; measure the size of the treat in the context of your financial world and your needs and wants.

An income tax refund is your hard-earned income that is being returned to you.

Your income tax refund is NOT new-found money. It is money that you have been lending to the government for the past 12-16 months. Make sure this money works for you and improves your life. Once you know the options, you are the best person to decide what that is.