(and how not to)
While it might feel like a responsibility-free bonus, a tax refund could be just what you need to improve your financial situation. Rather than blowing it all on a holiday or a fun new purchase, consider your priorities and set out a plan.
Here are some do’s and don’ts for using the windfall wisely.
Make a plan
Look at your financial situation and identify where the money could best be spent to relieve pressure on you and your family. Perhaps it could make a big difference in saving towards your children’s education or a deposit on a new home.
Start an ‘Emergency’ fund
Experts advise putting at least three months’ salary aside to be used for unexpected repairs, accidents, illnesses,
etc, but that amount can take a long time to accumulate. It only takes one large expense that wasn’t budgeted for to send you into a debt spiral, so bolster your emergency savings with your refund for peace of mind.
Pay off high-interest debt
After setting up an emergency fund, the best use of a tax refund is paying off debt. Reduce or wipe out the debts
with the highest interest rates, like store credit and home, car or student loans.
Treat yourself a little
There’s a difference between being responsible and being grimly austere. Put aside 5-10% of your refund to spend on
something you’ve been eyeing out, or take the family on a shopping spree or getaway.
Leave it in your cheque account
If you can’t think of a beneficial way to spend the money, don’t let it languish in your cheque account, where you’ll find it easy to spend on a shopping spree or a few meals out over time. Remember, that money won’t be replenished: it’s a once-off amount that could be extremely helpful in the future. Move the money to a savings account, where it will gather interest and be available when you need it.
Earmark it for a new loan
It can be tempting to apply for a loan in anticipation of receiving a tax refund, but chances are that a loan you couldn’t ordinarily afford will be offered to you at a high interest rate. Also, the tax return you anticipate might not amount to as much as you’d expected, which could leave you in financial trouble down the road.
Fall back into the same habits
Make sure that once you’ve paid your debt, you don’t fall back into the same habits. Stop using your store credit cards, for example, and don’t carry them with you when you go shopping.
Go too big
If your refund’s larger than expected, it could be tempting to go big and put down a deposit on a new car. Keep in mind, though, that your tax refund will eventually run out and you’ll be left with monthly payments that aren’t tenable,
given your monthly salary.
COMPILED BY CAITLIN GENG PHOTOS: FOTOLIA.COM