Don't blow your tax refund

You may soon find yourself with a big tax refund burning a hole in your pocket.

The deadline to file your 2017 taxes is today and according to the CRA, the average Canadian is entitled to a refund and the average refund seems to be around $2,000.  

Before you splurge on a vacation to Las Vegas or go out on a shopping spree, take a minute to consider what you’re giving up.

It’s important to stop treating this like found money and remember that it’s actually just part of the money you earned for work last year and the CRA is simply returning the interest free loan that you gave them.

If you have any outstanding bills or high interest debt on credit cards, you should look to pay these down or off before considering anything else.

Instead of paying a little bit against each debt, allocate 100 per cent of the money to the loan with the highest interest rate first.

But what if you don’t have any debt besides a mortgage with a locked-in low interest rate?

And let’s assume you’ve already been doing an excellent job of saving for retirement as well and are on track to reach the goals laid out in your customized financial plan.

Are you free to go blow the tax refund then?

I would suggest considering what use of this money would bring you the most joy. A new television or a weekend in Vegas would be nice, but the joy from either expense would pass fairly soon.     

Instead, consider putting the money into a separate investment account, ideally a TFSA if you have available room. This may not be the most exciting or satisfying option at the start but can become more appealing if you also create a long-term goal for this money. 

If you get a $2,000 refund each year and you work for 20 more years, this small amount will quickly snowball into something much bigger with the wonders of compounding.

Let’s also assume an annual interest rate of six per cent in this TFSA and we’ll ignore inflation to keep things simple. Your side pot of “play money” will have grown to $81,532 when you’re ready to retire.

In addition to building up a nice “emergency fund” for unexpected road bumps in your future finances, the money will be there if it’s not otherwise needed to do a much bigger splurge on yourself or your family when you retire.

Consider what you would be able to do with an extra $81,532 of mad money.

The funds could be used to buy a nice BMW convertible to enjoy the Okanagan summers. It would be more than enough to fully fund a trip of a lifetime around the world for you and your family. Or you may even elect to use the money as a down payment for a first home for your kids.

Whatever you decide to do with it, I have little doubt that it’s use will be a memory that you’ll never forget. 

For those that absolutely must have some instant gratification by spending money now, consider taking just five per cent of your refund amount and blowing that.

You will get the same instant joy with a nice dinner out or a new outfit, but the remaining 95 per cent will be there to grow into something so much bigger.

Your future self will thank you.     

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.