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rob carrick

A big tax refund puts the same pressure on you as a lottery win.

There's an opportunity to do some things you normally can't afford when a cheque from the Canada Revenue Agency arrives (or a direct deposit lands in your bank account). Don't blow it.

To help you make sound choices, consult this Quick Guide to Tax Refunds for Busy People. I put together this decision-making tool with the help of KCM Wealth Management's Adrian Mastracci, who recently did something you don't often see in the financial realm.

In a handout titled Best Uses for Tax Refunds, Mr. Mastracci acknowledged that there's more to life than investing and reducing debt. He actually suggested giving some money to charity, and spending a little on your family. "Put your tax refund money away for a little while and think about how it could benefit the family and you," Mr. Mastracci said.

To start

If your cheque is for a few hundred dollars or less: Treat yourself. And then aim to treat yourself one less time during the year, thereby freeing up some extra money to save.

If your cheque is for more than that: Divide evenly into three pieces, one for debt repayment and investing, one for family, and one for charity.

Are there exceptions? If you're carrying a large balance on your credit card bill, use the whole refund to pay down your debt. There's no higher financial priority than killing a debt with an interest rate in the 20-per-cent range.

The debt/investing part

If you're torn between investing and debt repayment: If paying off debts would give you more money to save and invest on a regular basis, then use this one-third portion of your refund exclusively to pay down the amount you owe.

If you need help deciding which debts to attack first: Start on the debt with the highest interest rate. Barring credit cards, this could be a loan or line of credit.

If you're a recent graduate: Pay off student loans first, assuming you have no credit card balance.

If you have a big mortgage: Data collected for the Canadian Association of Accredited Mortgage Professionals show that the average mortgage rate, as of late last year, was 3.5 per cent. That's amazingly cheap in historical terms, but still worth paying down. Rates are low today, but they're being applied to mortgage amounts that are being cranked higher by rising house prices.

If you don't have an emergency fund: Then the investing portion of your tax refund goes into an emergency fund housed in a high interest savings account. You can use a tax-free savings account for your emergency fund if you have the contribution room. Don't sweat the low return on your savings – the first priority for this money is to keep it safe and available for use at any time.

If you're an aspiring first-time home buyer: Build your down payment by parking some of your tax refund in a high-interest account.

If you have young kids: Then the investing money should go into a registered education savings plan (RESP), where every dollar you contribute up to $2,500 a year per child receives 20 cents in government grant money (lower and middle-income families get a little more grant money).

If you have neglected retirement saving: Put some money in your registered retirement savings plan or TFSA. RRSPs work best when you take the tax refund they generate for you and reinvest it back into the plan.

If you're having trouble deciding where to invest: Do RESPs this year, then TFSAs or RRSPs next year. Keep alternating and don't worry about making "wrong choices." Investing in any format beats not investing.

The charity part

If you don't make regular charitable donations through the year: Here's your chance to catch up. Your first $200 in donations per year qualify for a 15-per-cent federal tax credit, and anything above that gets a credit of 29 per cent (there are provincial charitable tax credits as well).

If you have never made a charitable donation before: The First-Time Donor's Super Credit bumps up the credits mentioned above by an additional 25 per cent for donations of up to $1,000.

The family part

If you're planning to dip into your line of credit for family or household expenses this year: Your tax refund is money well spent if it's used to cover expenditures like vacations for which you'd otherwise need to borrow.

Follow me on Twitter: @rcarrick

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