There is at least one pleasant aspect to submitting your tax return: the possibility of obtaining an Income tax refund.
According to Revenue Agency data, just over half of the approximately 25 million tax returns received in 2017 were eligible for an average refund of $ 1,670.
If you receive a refund, you must decide what to do with it. It might be tempting for spending it on the spot. Who wouldn’t want a trip, a new car, or a brand new kitchen? It is important, however, to consider all of the options available to you, such as paying down debt or saving for the future.
Whether you’re just starting your career, about to start a family, or are saving for a home, some ways are here you can use your repayment wisely.
Pay off debts especially those with high-interest rates
According to a survey by Global News in late 2017, the demographic with the most debt is Generation X (the 35-54 age group). Its members declare having debts of $ 10,000 on average, and that is without counting their mortgage. This includes credit card debts, which can carry interest rates approaching 20%. At this rate, monthly payments can make a hole in a budget.
The Financial Consumer Agency offers advice on how to manage your debts
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It recommends paying off debts with the highest interest rates first, such as payday loans and credit card balances. By doing so, you will pay less interest and have more money to reduce your overall debt.
Once you have determined which debt to attack in priority, you can define a strategy to repay it. Many Americans have mortgage debt. Financial Consumer Agency suggests various strategies to pay off your mortgage faster, such as paying a lump sum or increasing your regular payments.
Saving for retirement
Statistics confirm it: Americans are not saving enough for their retirement. Government programs will provide a basic income for many when they retire, but you need to take into account your own needs and wants when determining which additional sum you will have to accumulate.
There is good news, however: the sooner you start saving, the longer the value of investments can grow, thanks to wise choices.
The registered retirement savings plan is the best-known retirement savings option. It allows you to make contributions each year without paying tax on them until you withdraw money from your registered retirement savings plan (hopefully at a lower tax rate). In fact, your registered retirement savings plan contributions can increase your Income tax refund.
Save for other long-term goals
Beyond the long-term goal of retirement, there are many other reasons to save. Financial Consumer Agency recommends that Americans set up an emergency fund to deal with the unexpected, like a medical emergency or losing a job. This can be done slowly, by making small weekly contributions to a separate savings account. You can also use part of your tax refund to set up an emergency fund, which you will grow over time.
The same process can be followed to achieve other savings goals, such as a wedding or down payment for the purchase of a house. You can set aside a portion of your tax refund, then add small periodic contributions to achieve your goal.
Saving for a child’s education
If you are expecting a child or are the parent of a newborn baby, you have probably already thought about the costs of raising them. The average tuition fee for a year of undergraduate university study in New York was $ 6,571 in 2017, according to Statistics New York. In addition, overall, tuition fees are expected to continue to increase. Fortunately, some government programs can help you save for your children, the best known being the Registered Education Savings Plan (RESP).
Buy life insurance
If you have or are about to have young children, you should consider purchasing life insurance, if you have not already done so. According to a recent survey by investment company Edward Jones, less than a third of Americans have insurance coverage for the unexpected, such as death or serious illness.
Such protection is important. You probably want your children to have financial security if the unthinkable should happen to you or someone responsible for your children. The two most common types of life insurance are term life insurance – a more economical option that covers the insured for a defined period and participating whole life insurance which provides protection along with the opportunity to accumulate a cash surrender value in the policy on a tax-advantaged basis.
No matter the way you decide to use your tax refund retirement savings, debt repayment, or insurance purchase an advisor can help you make the choices best suited to your financial situation.