Well, football season is officially over. The New England Patriots, led by G.O.A.T. quarterback Tom Brady, clinched their sixth Super Bowl win against the Los Angeles Rams. In addition to the record-setting win by the Pats, it was also a record setting game in terms of how incredibly uneventful it was. Imagine spending $2,000 to watch Maroon 5 play at halftime…because there really wasn’t much of a football game.
Who knew that saving money could now actually be more fun than watching the Super Bowl??
For those who are expecting a tax refund this year, you might be day dreaming of all the fun things that you could be using that money on…maybe a vacation to somewhere warm to escape the cold dark winter?
Hold on a sec. A tax refund isn’t free money, nor a bonus. It is your own hard earned money that you loaned to the government, interest-free for the year. You’re receiving that money back because you overpaid on income taxes throughout the year. There are better ways I think that you could use the tax refund to bring you one step closer to financial freedom. Let’s chat about them briefly.
1. Pay down debt
Paying down high interest credit card debt first is a no brainer. Check out our previous post on that here. If you have any money left over, or you don’t have credit card debt (pat on the back for you!), then consider making a lump-sum payment towards your mortgage or any other consumer level-debt such as a car loan, line of credit, etc.
As we said before, “debt really only makes sense if it increases your overall net worth in the long run (think a reasonable home purchase, or if an investment in the markets yields more than the interest being charged on debt; and right now, finding a security that consistently offers a return greater than the 18%interest charge on a credit card is practically impossible).”
2. Put your money to work
If you haven’t already started a retirement savings plan (RRSP) or contributed to your TFSA, then now is the best time to start with your newfound windfall. We discussed the differences between a TFSA and RRSP here.
3. Create an Emergency Fund
An emergency fund is money you set aside to pay for expenses resulting from an unexpected situation or a drop in income at some point in your lifetime (Government of Canada).
These surprises usually don’t give you time to adjust your budget.
Some examples include:
- car breakdown
- urgent visit to the veterinarian
- job loss
- health problems that prevent you from working
In general, it’s recommended that you save the equivalent of 3 to 6 months of your regular expenses. You can also aim to save 3 to 6 months of income. Both methods are effective, so choose whichever one works for you.
4. Invest in yourself
Benjamin Franklin has been quoted as saying, “an investment in knowledge pays the best interest.” It’s never too late to take a course to improve your skills, or pursue a new degree or diploma to make a career change. The only caveat here is that you should make sure that the program you are looking into will actually pay the dividends in the future; that is, will it create a better opportunity to make more money in the future through promotions or a career change? Or more importantly, will it open doors to a career that you believe will be more fulfilling? If you answered yes to either of those questions, then it might be something worth pursuing.
What do you do with your tax refund? Let us know in the comments below!