So you just got your Income Tax Return. What is the best way to use it?
Ever wonder if you should you focus on building up savings or paying off debt first? In a (recent) survey asking people what they would do with an extra $1,000, the results showed a near-tie between saving (42%) and paying down debt (41%).
To find the best answer for you, ask yourself the following questions:
- Do you already have an emergency fund? Everyone needs emergency saving, even those with existing high-interest credit card debt. Because emergencies can happen at any time, you can’t necessarily count on credit cards or other loans to protect you. Aim to have at least three months’ worth of expenses in the bank. Even if money is tight, make putting aside a portion of your paycheck for emergencies a priority. If you already have an emergency fund, go to the next question.
- How much is your debt costing you? Many people don’t take the time to do the math. Here’s how: Make a list of all your loans (auto, mortgage, credit cards, etc.) and next to each amount, write down the interest rate. Multiply the two numbers, and that’s about how much that loan is costing you per year. That’s a valuable piece of information!
- Compare the results from #1 and #2. Would paying off a chunk of your debt save you more money than you could earn by saving the cash? If so, then you might be better off paying off the debt. Another important point to consider: What are your financial goals (buying a house, starting a business, etc.)? Assuming you have an emergency fund in place, the final answer varies with each individual, and might involve a mixture of both saving and paying off your debt.
Paying off debt is the easiest part, you know exactly who is calling and asking for your payments. Saving, now that’s another thing. Where is the best place to save? That depends on your goals. A personal Financial Advisor can help you decide what is best for your personal situation, but let me show you a staggering example that value of saving in a mutual fund – be it a TFSA or an RRSP.
If you received $1,000 as an Income Tax Return EACH year until you retire. Let’s say that you are now 25 years old. If you were to save (invest) that each year into a portfolio making 6%, you would have put in $40,000 and your investment would be worth $171,400 by age 65 Pretty nice little addition to your nest egg, I would say.
So what’s the answer as to how to get more money from the government? Put your Income Tax Return into your RRSP, and get paid on what they have already given you.
By Deborah Raymond
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