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Tax Refunds

Spend or save? It can be prudent to splurge with your tax refund Add to ...

What could Kamillia Kashefi do with the $300 tax refund she has been getting over the past few years? Pay for a few grocery bills, cover a portion of her Toronto rent, pick up a few pairs of jeans.

But that refund was child's play compared to what the 24-year-old (who nabbed a full-time job last year) expects to get this spring: $1,600. Ka-ching.

The prudent choice, the communications co-ordinator says, is to throw the refund at the $4,000 student loan hanging over her head. But she's decided instead to splurge on a laptop she's been eyeing for months.

"My mother gave me a very stern look when she asked me about it," Ms. Kashefi says.

According to a recent survey of 1,514 Canadians by H&R Block Canada, nearly nine out of 10 Canadians said they'd be submitting their tax return before April 24 -- more than a week ahead of this year's May 2 deadline. Why no foot-dragging? Because they're eager to get their hands on their refunds.

A Leger Marketing survey commissioned by BMO Nesbitt Burns last tax season found 12 per cent planned to put their refunds towards travel and/or leisure.

While many financial advisers (not to mention Ms. Kashefi's mom) recommend directing those lofty refunds toward debt reduction or into an RRSP (after all, they're not windfalls but your own money that functioned as an interest-free loan to the government), you can't always fight the id. But there's an argument to be made for occasional indulgent purchases. In fact, if you are going to spend a large chunk of that refund on yourself, this might be the best time of the year to do it.

"When you take money and not punish yourself with it … you become more successful with money," Trevor LeDrew, a regional director at Investors Group in Windsor, Ont., says. His rule: put one-third toward debt repayment, one-third toward savings and use that last third as "reward money."

Ms. Kashefi uses her age to justify her decision to splurge. One of her friends is using her own sizable refund to pay for a pair of designer shoes.

"We have the rest of our lives to be responsible," Ms. Kashefi says.

But buying a laptop this time of year might actually be responsible -- at least if you're planning to acquire one anyway. When dealnews, an American deal-hunting website, tracked price trends for one popular laptop model in 2009, it found dips not only in August and September but also in April. That price drop, some theorize, is due to electronics manufacturers releasing new products in the spring, forcing retailers to clear out old stock.

It's the same time of year, according to productivity blog Lifehacker, when you can score good deals on car parts (old inventory on sale when prime fixing up season begins), patio sets (same deal), cookware (it's Mother's Day, wedding and graduation gift time) and cruises (it's the time of year when cruise lines move ships so you can score good last-minute deals).

When Walnut Ridge, Ark.-based personal finance blogger Ron Haynes spotted one such deal for an Alaskan cruise last year, he used his tax refund to pay for it -- and caught flak from many of his loyal readers. In his blog the Wisdom Journal, he often preaches about saving (most readers expected him to tuck his refund away in a retirement savings plan).

"I got a couple of e-mails from some people questioning how I could spend that much money when I was trying to write about personal finance," Mr. Haynes, 45, recalls.

His response? "Part of your budget has to include some fun money."

The deductions from some unexpected medical bills triggered the refund - usually he has his "taxes figured out so [he]will pretty much hit at zero at the end of the year."

This was a rare opportunity to move forward on a 20th anniversary getaway he thought he and his wife would have to put off till later in the year. The couple had already saved $3,500 and the $1,500 refund top up was what they needed to make up the balance of the cost.

Decades ago, when Mr. Haynes was deep in debt, he'd still set aside a small portion of his meagre earnings to take his family out on a road trip to escape the drudgery of putting every spare penny into paying off maxed-out credit cards.

"There's a balance there. If you have $150,000 in credit-card debt and you get $2,500 in a tax refund, obviously most of that has to go to debt repayment," he says. "Take 10 per cent, go somewhere, get away, recharge your batteries."

Kathryn MacKay, a 27-year-old public health researcher is following that line of thinking this year. She accumulated debt on a line of credit while in graduate school and found the cost of living in Toronto got in the way of her paying it off as quickly as she wanted. She sets aside $500 to $600 a month to put towards her $24,000 debt, but it will still take a few years to pay it off fully (all while the interest grows on it).

She's eagerly anticipating her refund cheque this year -- worth an expected $2,400 -- and plans to put most of it toward the line of credit.

"It's an easy bonus way to get ahead a few months," she says.

But she's also going to treat herself to an iPod classic, a product she's had her eyes on for years but could never justify buying.

"It's nice to just feel relaxed when making a purchase like that instead of feeling a bit of buyer's remorse," she says. "It'll be extra nice not to put it on a Visa."

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