Tweet

What should I do with my tax refund?

Written by: Rhonda Sherwood

Article Overview: Do you remember the good old days when spending our tax refund frivolously wasn't such a big deal? Our jobs were stable, house values seemed to be on a never-ending climb and the stock market was booming. Things were looking pretty good. Well, we are all feeling a little less wealthy these days; our portfolios have been beaten up, the wealth in our homes have taken a blow and on top of all that, we are worried about our jobs and the stability of our income. There is a lot of insecurity or fear out there and so spending our tax refund on a great vacation or a new flat screen TV may not be the most financially savvy thing to do. So what should we do with this year's tax refund- spend it or save it, invest it or splurge?

What should I do with my tax refund?

Do you remember the good old days when spending our tax refund frivolously wasn't such a big deal? Our jobs were stable, house values seemed to be on a never-ending climb and the stock market was booming. Things were looking pretty good. Well, we are all feeling a little less wealthy these days; our portfolios have been beaten up, the wealth in our homes have taken a blow and on top of all that, we are worried about our jobs and the stability of our income. There is a lot of insecurity or fear out there and so spending our tax refund on a great vacation or a new flat screen TV may not be the most financially savvy thing to do.

So what should we do with this year's tax refund- spend it or save it, invest it or splurge?

Well, that all depends. In these tough times, it is a good idea to give some thought to your overall financial health with the first and most obvious area being your emergency reserves. Lets take Karen for example, a 42 year old marketing executive with a small independent firm who wants to know what she should be doing with her estimated $10,000 tax refund. In past years, Karen just reinvested her refund into her RRSP but this year things have changed. Karen's company has been hit hard by the economic slump and has been hinting that layoffs are eminent. Although Karen is a long time employee with seniority she is not immune to layoffs.

The first thing Karen needs to do is evaluate her existing emergency savings funds to ensure that she has at least 3 to 6 months of living expenses set aside. Knowing that you have some backup money just in case can definitely ease some of your anxiety about what may happen. If Karen has little in the way of savings, a tax refund can give her the means to start building up a reserve. I would also suggest that Karen open up a low rate line of credit to help make up for the shortfall in savings. It is easier to qualify for debt when you have income, keeping in mind that this line of credit is ONLY to be used to help pay bills or pay emergency expenses.

Let's assume that Karen does have an adequate emergency savings fund, how then should she best use her tax refund?

Karen should review her overall debt load and either consolidate her loans into one low rate loan or start aggressively paying down any high rate loans. You would be quite surprised at how many people have no idea how much they owe and what it is actually costing them to borrow it. Most often this is because we have way too much debt and it's all over the place. So we need to simplify our debt. We can do this by taking all our loan statements to our banker and ask if they can consolidate them into one, low rate, manageable loan. If you have only one loan payment, it not only makes life much simpler but also makes getting out of debt much more 'doable'. Now if you have some high interest rate loans that you cannot negotiate into a lower rate loan then I would highly advise you to make it a priority to start aggressively paying them down. Use your tax refund here.

What if you have already paid off your debt and have a sizable emergency fund- then what?

Lets say that Karen has a healthy savings accounts and no debt with the exception of her 4% mortgage, what then should she do with her refund? Today's low interest rates and stock markets make it a good time to invest versus paying down debt. Karen is in a high tax bracket, has a long time horizon and is a moderately aggressive investor who should yield between 7-8% over the long term. With all this in mind, investing versus paying down her 4% mortgage makes more sense for her. And since Karen's tax refund was earned by making contributions to her RRSP, then why not continue the cycle and invest back into the RRSP creating an ever-growing nest egg. The $10,000 contribution would generate a $4,000 refund at the 40% marginal tax bracket, which she can throw back into the RRSP again next year.

So what should you do with your tax refund?

It's important that you understand your unique financial circumstances before making any decisions. Use the refund productively and resist the temptation to spend it on frivolous items. In the long run you will be better off having money in the bank, with little to no debt then a big TV or 'just' the memory of a two week vacation........

Related Articles
  6 Things to Do With Your Tax Refund.
  How good is your guarantee?
  Tax Refund Loans - Changes Are Coming
  Making Sales Stick; A Simple Strategy Guaranteed to Increase Your Success
  What’s Your Small Business Guarantee?

Article Tags: anxiety, economic slump, financial health, flat screen tv, great vacation, house values, independent firm, insecurity, layoffs, living expenses, long time, marketing, portfolios, rrsp, seniority, splurge, stock market, tax refund, time employee, tough times



Related Forum Posts
Re: Refund Policies - Wow - and I thought I was doing work for an unreasonable individual. Your client takes the cake! I agree with Kevin. You've done enough work where you shouldn't have to refund any money. Just present her with the itemized bill of what you've done, and tell her NOW that it would be best if she found a service that could better suit her needs...as it really sounds like she's going to let you do all the work and then get that refund from you anyway...in other words, sounds like a scam.
Re: Can you really get google ads for free? - I can't speak for Barbara was I was speaking about the honesty and quality of a sales letter. If the page is dishonest - try getting a refund when you've bought a worthless product or a product that was misrepresented on the sales page. Many hours can be wasted trying to get a refund. At that point, its a matter of how much have you actually lost and how much time can you waste trying to get your money back. That is not as simple as ABC. Shri
How Can I Make Money Out of This Need? - I came across an interesting piece of news while surfing the web today. A site called Mortgage Loan Place had this paragrpah: If you bought your home after Sept. 1, 1983 with a FHA loan, chances are you had to purchase mortgage insurance. The FHA was supposed to refund that insurance back to you if you made all of your payments and have paid off your mortgage. The Department of Housing and Urban Development (HUD) says that approximately 30 percent of those refunds never get claimed. $450 million waiting to be claimed And there is a search box there where you input a last name, and a list of all the people with that last name who are owed money by the FHA comes up. Most of those people seem to be owed only a couple of hundred dollars, but some are owed over a thousand dollars. And the records cover everybody from 1983 onward... So I'm wondering... is there any point in contacting these people (their addresses are given), telling them that they've forgotten to claim this refund? The thing is... that would be the good samaritan thing to do... but I'm wondering if there's any way to monetize the service. All I can do is tell the people they're due a refund - they just have to apply for it, so it's not like I'd actually be providing any kind of service, except one of information dissemination. Anyone have any thoughts?
Re: e-Commerce and e-Payment providers - I like PayPal because of how they handle refunds. If you buy something from someone thru PayPal and there is something defective about the product, you can request a refund. If the supplier is difficult, then PayPal will "force" the supplier to issue a refund. That's the test of a good product..how do they handle things when something goes bad. It's easy to handle things when things are going well. I think the same goes for your car insurance. How good they are depends on how they behae when you have an accident. Aneshia
Re: Refund Policies - [quote="Donna":n9wbsjes]She was fine in the beginning and seemed to be a "normal person". The problems began to creep up when she had friends offering to blog about her. At that point, she became a pain. Funny thing is that her friends blogging about her aren't generating sales - so, that's fine. We now have a refund policy that covers the problem. Its difficult to totally protect yourself from stupid problems, but being sued and dealing with the associated tension just wasn't worth it for that amount. Shri and I discussed the entire situation and she made the right decision. She could've refused the refund, but you have to decide how much that hassle is worth to you and she dealt with the woman for hours to resolve the situaiton - thereby wasting more time than the refund was worth. At the point she demanded the refund, about half the work had been done, so basically the business is out about $125 -- that amount is not worth the headache of dealing with attorneys and lawsuits. She had gotten a very good price to begin with and that seems to make people even more difficult. Donna[/quote:n9wbsjes] Hi Donna, I think that's a growing problem with a lot of customers these days. People will often buy a product or service and then second guess their decision by consulting with their family and friends afterwards (rather than before, which would've saved everyone a lot of time and money). More importantly, non-entrepreneurs are often very opinionated about the ways to run a small business and can easily influence a customer's actions (like that troublesome client you had).


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

The Biggest Domain Name Myth

A Guide to Franchise Financing

In the Year 2020 . . . Process

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.