How to use your Tax Refund to Pay off DebtFeb 27, 2015
It’s February and winter is still in full swing here in Newmarket, but spring is on its way in a few weeks and that means the arrival of tax season. For most Canadians, the tax deadline is on April 30 but you can start to file your 2014 taxes at any time now. Some Canadian residents look at this time with excitement about a potentially large tax return, while others dread the idea that they may owe the Canada Revenue Agency money. This article will focus on those receiving a tax refund, but if you’re on the side of owing money this is still worth a read.
Remember if you do end up owing money and are struggling with income tax debt already seeking professional debt advice can help you become debt-free and reach your financial goals faster.
If you are expecting to receive a refund the urge to take this tax refund and go on a shopping spree always sounds like a great way to cure the winter blues. However, it can inevitably lead to overspending and additional debt; putting you in a debt situation worse than before. When dealing with your debt a tax refund can be an excellent way to make a significant investment in yourself and pay off debt.
Remember when filing your taxes to take advantage of deductions and tax credits offered by the Canadian Government. There are some new ones implemented for the 2014 tax year that focus heavily on families. If you are not comfortable filing your own taxes a professional tax service can help you make sure you are doing it properly and help find deductions and tax credits you might miss.
Once you know what your tax refund will be its time to start planning. You can build a rough plan but don’t implement it until the money is in your account because the Canada Revenue Agency can make adjustments to your return. Typically when that happens you get less back than you were anticipating.
So now that you have your income tax refund, how should you allocate these funds to help pay down your debt? Here’s a few things to keep in mind…
- Put together a list of all your debts and rank them from least to most in terms of how much you need to pay back
- If you are set on spending some of your tax refund on yourself set limitations such as only allocating 10-15% of your refund towards personal expenses
- Using your list from above use your refund to pay down or pay off your smallest debts first
You will get a great feeling of satisfaction if you are able to use your tax refund to completely pay off a smaller debt. If you do manage to pay off a debt make sure to close the account. For instance you have paid off a secondary credit card, if it’s not vital to your survival you don’t need it. Close it or reduce the limit and then put it away for good.
Now that you have used your tax refund and were able to able to pay off one of your debts that does not mean you have extra money to spend next month. Continue to plan to set aside the monthly payment for that debt and use it in one of two ways, or both depending on how much it is:
- Use the monthly payment amount from the paid off debt and put it towards making an extra payment on your next lowest debt
- Use the monthly payment amount from that no longer existing debt and put it into a savings account that is not to be touched unless it is an absolute emergency (job loss, medical emergency, etc.)
Doing one or a combination of both will let you pay down other debts faster. As you continue to pay off debts continue to use this same process and you will see significant growth in your savings and a major reduction in your debt. Eventually putting you on a path towards becoming debt-free.
Remember a tax refund can be a great tool in helping you pay off debt faster, so be smart with your money and if you ever have questions or need help there are debt professionals willing to help.
Share with us how you plan to spend your tax refund this year on Twitter at #RefundYourDebt.