Canadian Finance Blog

Posted: 23 Mar 2011 02:00 AM PDT

Ah, taxes. The time of year where so many people agonize over where they are going to find enough money to pay the government, while so many others gleefully spend their massive tax refund. Its an amusing dichotomy, and it makes for some interesting anecdotes as I see the way friends and acquaintances plan to deal with their financial situation. If you’re like me, you will be getting a tax refund this year. Thanks to some old student tuition credits, my wife and I will both be getting some money back on our taxes, and so we have to figure out exactly how we are going to deal with the money. While we already have an idea of what we are going to do with the money, others may not. Here is what you should do with your tax refund.

First, take 10%, and buy whatever you want. Splurge. You deserve it. Not only will it make you feel good, but it will keep you from becoming bitter or disappointed with what you are going to do with the rest. Take the other 90% and dump it into one (or more) these categories, preferably in the following order.

Emergency Fund (if you don’t have one)
Debt Repayment
Emergency Fund (if it is less than 3-6 months of expenses)
Savings
Retirement
Vacation

Start An Emergency Fund

If you don’t have one, this is the absolute perfect way to jump start an emergency fund. I know you want to take the money and go visit your parents, or take the kids to the zoo, or pay off your credit card, but if you don’t have an emergency fund, start one immediately. It provides peace of mind to know that you have money in case of any sort of disaster, and you will save money in the long run setting aside a grand or two now.

Debt Repayment

If you have debt, pay it off as quick as you can. While it is difficult to slog through the year paying off your student loans $50 at a time (I would know), dropping a couple thousand on it at once could significantly reduce the interest that you are paying, as well as give you a huge motivational boost that will (hopefully) last you one more year.

Increase Your Emergency Fund

Even if you already do have an emergency fund, if you don’t have any more debt remaining, then it is definitely worth it to make sure that your emergency fund is big enough. How big, exactly, is a matter of debate, and it basically comes down to make sure that you are comfortable with it. So take a look at how big your emergency fund is, calculate how long that might last you if you or your spouse were to lose your jobs, for example, and decide if you need to grow your emergency fund some more.

Savings

You are saving for something, right? Maybe a new car, or a house, or saving simply for the sake of saving. You can use your tax refund to push you that much closer to achieving your savings goal.

Retirement

If you already own your home, your cars, you don’t have any debt, then it is definitely past time you made sure your retirement savings were maxed. No matter how young or how old you are, there is no harm in putting aside money for the day when you won’t be working anymore. Invest your tax refund to max out your RRSP contribution and ensure you are taking advantage of any pension plan your employer might offer.

Vacation

If, and only if, you already have a huge emergency fund, no debt, everything you could possibly hope for AND have maxed out your retirement savings, then please, go take a vacation. You are obviously working hard enough already, so take some vacation time and spend your tax refund on a great experience. It is far better to spend money on creating memories, rather than owning things, so go to Greece, or the Caribean, or go and stay a week at a hotel in town.

How are you going to spend your tax refund?

What To Do With Your Tax Refund originally appeared on Canadian Finance Blog on March 23, 2011.