It’s tax season!
That wonderful time of year you when you file your income taxes and either 1) hope for a nice refund or 2) get stung with an unexpected tax bill. If you are the latter, I hope you will have a discussion with your accountant or financial advisor to determine how you can avoid and/or save for an unexpected tax ‘ouch’ next year. If you are the former – woohoo! You get reimbursed for the hard-earned money that you lent interest-free to the government for the last 12 months! (Because that is what an income tax refund is – simply the government returning the money you earned and over-paid to them in taxes throughout the year).
So – if you are fortunate enough to get a refund this year what should you spend it on?
Decisions, decisions…you could go on a last-minute vacay somewhere warm, I wouldn’t blame you for wanting to escape this frigid winter…you could buy a brand new car (which will decrease in value by 20% the instant you drive it off the lot)…you could treat yo’self to some new clothes, or check out that fantasy shopping cart you’ve been filling up online throughout the year.
Unfortunately, the problem with any of these things is that the feeling you will get from spending this money is fleeting – sure it may feel good the second you click ‘checkout’ or post a picture of your vacation or car on instagram…but in a week, a year, a month will that expense still bring you that same level of joy?
Why not this year, you do something really crazy and spend the money on your FUTURE SELF. Choosing to save or invest that tax refund will immediately make you feel good for doing something responsible (aka “adult-ing”) but it will also make you feel good next week, next month, and certainly years down the road when that savings or investment continues to grow.
Now – if you currently carry a large amount of consumer debt (credit cards or line of credit) I would advise paying that down instead. I would also recommend you create a budget and devise a debt-repayment plan to eliminate that debt altogether. If you are wondering what makes more sense: debt repayment or investing – here’s a handy calculator to help you decide.
However, if you do not have any high-interest debt and just have that refund burning a hole in your wallet – let me show you what investing it could do for you. Say you receive a nice refund of $1500 this year – lucky you! If you absolutely have the urge to treat yourself - take a bit and do just that. If your refund is $1500 take 10-25% ($150-$375) and just spend it, blow it, whatever – everything in balance, right? This gives you that thrill you’ve been seeking and you can reward yourself pretty nicely with that little chunk of cash.
Next, take the remaining 75-90% and INVEST it. Taking that $1,125-$1,350 and putting it away (where you cannot view it or easily access it online) in an investment every year for the next 10 years and estimating a 5% Rate of return – you should accumulate $14,857.63 - $17,829.16. Not too shabby. Furthermore, if you put that money in an RRSP and have a marginal tax rate of 33.25% you will increase your refund next year by an additional $374-$449. When you get your quarterly statement you can be reminded every three months of what a smart, responsible person you are and eliminate some of the stress you may have about saving for your future.
So SPEND that refund? Absolutely, yes! But spend it on your future self. Future you will thank you for it!
Brooklyn Scott is a Financial Advisor/Mutual Funds Representative for Lewis & Jones Group/Desjardins Financial Group/Desjardins Financial Security Investments Inc. in Killarney, Manitoba.
Mutual funds are distributed through Desjardins Financial Security Investments Inc. For insurance products, Desjardins Financial Security Investments Inc. acts as a national insurance brokerage agency.