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Preet Banerjee

A tax refund isn't really 'found money' Add to ...

With just under two weeks for the majority of Canadians to file their taxes, the majority of Canadians will probably file their taxes in just under two weeks.

Yes, many of us are procrastinators. Myself included.

And since so many Canadians get a refund, that extra cash hits our collective hands at essentially the same time. Unfortunately that might be when discounts and sales are slimmest, since retailers know there’s money burning holes in people’s pockets.

If you are planning on spending that money, you could consider temporarily parking it in a high-interest savings account or GIC to take some extra time to find a deal, or wait for them to come to you. Perhaps after everyone else has finished overheating the cash registers in May and June?

Even better would be to do something productive with your refund, such as paying down debt or socking it away to cover the extra two years you might have to work before you get your Old Age Security payments.

For many people, a tax refund is seen as found money. The truth is that it was always your money, you just happened to have overpaid your taxes throughout the year. Some suggest filing a form that allows you to have less money deducted from your payroll throughout the year so that it’s not sitting with the government effectively in the form of an interest-free loan (from you to them). That’s sound mathematical advice, but practically speaking, it might not always be the right advice for everyone. Give people an extra $100 in monthly inflows, and many will have an extra $100 in monthly outflows without even blinking.

Of course, found money can also suffer the same fate. I have a friend who every year, upon being informed of the dollar amount of his tax refund, exclaims that it’s time to get a new dirt bike. It’s only happened once, but I know the intention is there, fleetingly, every year.

At the same time, I think that when faced with a large lump sum of money as opposed to a smaller monthly increase, people may be more inclined to think they can make an appreciable impact to their finances with a productive use of it. An extra $100 a month might seem trivial toward long-term goals (it isn’t). But a lump sum of $2,000 could feel great if it went to paying off a credit card, or making a lump sum prepayment on the mortgage. It can feel like you are making real progress.

You could also consider an insurance portfolio if you are lacking the basic coverage for life and disability insurance. Dying or losing the ability to work can wreak havoc on your family’s future but is often ignored. Retirement can be decades away, but death or disability can happen tomorrow.

If you are getting a refund this year, consider bolstering your insurance, paying down debt or investing. But if you feel you really do need a new dirt bike, I suppose that might be good for the economy, but maybe not so good for you.

Here are some productive uses for a tax refund

1) Life and/or disability insurance: Most financial goals have a long-term focus, but short-term risks can happen tomorrow and can seriously derail your plans.

2) Pay down debt: Highest interest debt gets a bigger bang for your buck, but if you are credit card debt-free, car loans and the mortgage are great candidates, too.

3) Contribute to your children’s RESP: It’s nice to have your original RRSP contribution provide a refund and then to have that refund generate extra money in the form of the Canada Education Savings Grant (at least an extra 20 per cent)

4) Create an emergency fund: If you’ve got debt under control, an emergency fund is a great starting block for financial security

5) Re-save: Lots of options including a TFSA, non-registered account, or even to get ahead on next year’s RRSP savings

Preet Banerjee, B.Sc, FMA, DMS, FCSI, is a W Network Money Expert, and blogs at wheredoesallmymoneygo.com. You can also follow him on twitter at @PreetBanerjee

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