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When in doubt, put your tax refund on your emergency savings account

The goal of many people is to make sure they get money back from their taxes. The goal of many people is to make sure they get money back from their taxes. Photo by Postmedia files

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After we file our taxes, we look forward to getting some of our hard-earned dollars back. Many people have plans for that money long before the refund is received. For some, it can be a welcome relief from a tight budget. For others, it may mean paying off debt or the ability to splurge on a luxury item. But maybe there’s a better way to use that money so that you get more of what you want or need all year round.

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Before deciding where that money could have the biggest impact, it’s important to assess your budget first. If you find yourself constantly in deficit, using your tax return to eliminate a monthly expense or debt can free up cash flow. For example, being able to prepay your auto insurance or property taxes for the year frees up money that would normally have gone into that monthly bill. This money may mean buying new clothes or going to the dentist or optometrist. Doing some much-needed self-care can be a great way to use those funds.

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Sometimes our budget deficits cannot be remedied by an annual cash inflow. There may be specific expenses in your budget that are causing a deficit. Not solving the problem by using your annual tax return to “get caught up”; it only delays the effects. To build a working budget, keep track of where your money is going. If your expenses exceed your income, it’s worth considering cutting back to balance your budget. If cutting your expenses isn’t an option, you may need to increase your income to ensure you cover all of your expenses and obligations.

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Often, high levels of debt can lead to persistent budget deficits. If this is the case for you, it may be helpful to use your tax refund to reduce some of that debt burden. However, if your tax refund isn’t enough to pay off enough debt to have the desired impact on your budget, it may be time to seek professional help.

One option is to apply for a consolidation loan from your bank or credit union to reduce your monthly payments and interest. You can also learn more about tackling your debt by talking to a credit counselor for free at a not-for-profit credit consulting firm. They can also help you improve your budgeting and money management skills to achieve a balanced budget, which is super important if you are consolidating your debts with a loan.

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If you find yourself using your tax refund to pay off Christmas bills, consider adding savings to your holiday budget year-round instead of always catching up. As with home repairs, it’s much less expensive to use your own money saved instead of paying 20-plus percent on a credit card.

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The goal of many people is to make sure they get money back from their taxes. They essentially use it as forced savings and it’s a great way to protect that money for yourself. However, Canada Revenue Agency (CRA) will not pay you interest on the money they have for you. If you find yourself consistently getting large tax refunds and your budget is getting tight every month, one of the ways to increase your income is to reduce the amount of tax withheld throughout the year.

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This is possible if you have had tax credits included on the TD1 form that you submit to the payroll administration at work. Instead of taking advantage of your credits once a year, you can take advantage each month when a little less is written off each of your paychecks. As nice as it is to receive that large amount at once every spring, the stress relief of a little breathing room every month will be even better.

You can also use your income tax refund to cover anticipated, but somewhat optional, annual expenses, such as your summer vacation or desired home improvements. Every year since we have been debt free, my husband and I have returned our money to invest in our house. There is always something we want to do. If we can’t think of something right away, we put the money in our “home maintenance” savings account until we’re ready to use it. We would rather use our own money than borrow and pay interest to the bank for our home improvements.

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When in doubt, put your tax refund into your emergency savings account. Whether you’re in debt or not, having an emergency fund is key to not being forced to use credit when an emergency arises. If the life of two years of pandemic has taught us anything, it’s how important it is to be prepared for the unexpected. If you save, you can endure most things life has to offer, including a record-breaking snowfall in April.

Sandra Fry is a Winnipeg-based credit counselor at Credit Counseling Society, a nonprofit organization that has helped Canadians manage debt for more than 25 years.

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