You received a large refund from your income taxes. What should you do with it?

The 2022 tax filing season has started and when filing income tax returns, everyone has the same hope, receiving a refund. The ones that are lucky enough to receive a refund then need to ask themselves, what’s the best use for the money. There are some that feel like it is “free” money and opt to treat themselves in different ways from trips, furniture, electronics, evenings out, etc. In reality, it’s money that’s been worked for over the prior year and deducted from pay cheques. A tax refund is essentially “free” money for Canada Revenue Agency as they were able to hold on to these funds for an extended period of time without having to pay you any interest for the use of your money. While it would be so easy to give into temptation, it’s better to think long term, and ask yourself, how could this money help you get ahead?

Clearing up debt is usually the first thing that comes to mind when people think of getting ahead. Receiving a refund could be a great start to paying down debt and moving forward. With the different sources of debt that some people carry, there’s also the question of where to start when paying down debt and which should be paid first? Below are a few of the popular debt payment methods that people may choose from:

Debt Snowball Method - you would focus on the debt with the lowest balance owing. You would make minimum payments on all your other debts and use the remainder of your funds for debt repayment to tackle your debt with the lowest balance first. Mathematically, this method will not maximize interest savings, however, the idea behind this method is that by focusing on your smallest debt first, after you pay it off, you will get an adrenaline boost from your "quick" win and stay motivated to continue attacking your debt in order of lowest balance owing first, working your way up to highest balance owed.

Debt Avalanche Method - you would focus on your debt with the highest interest rate first; regardless of balance owed. You would make minimum payments on all other debt and use the remainder of your debt repayment funds to tackle the debt with the highest interest rate first. Mathematically, this method will maximize interest savings over the life of your repayment strategy. If your debt with the highest interest rate is also your largest debt, you must be careful not to lose motivation by choosing this strategy as it will take some time before you can shift focus to another debt.

Debt Blizzard Method - this method involves a combination of the Snowball and Avalanche method. First, you would focus on your debt with the lowest balance first to get the adrenaline boost to stay motivated with your debt repayment plan and once the smallest debt is paid off, you would then focus on debt in priority of highest interest rate and work your way down.

If you are one of the few that have minimal or no debt, there are still a few things to consider doing with your tax refund before giving into temptation:

• Do you have an emergency fund set up? Is it enough or should you add more to it?
• Do you have annual expenses such as insurance which could be paid using a lump sum from your tax refund rather than paying monthly, thereby increasing future monthly cash-flow?
• Do you have a plan to reach your financial goals like saving for a house, vehicle, or a child’s education, etc.?
• Do you have a retirement plan in place that you regularly contribute to?

If an income tax refund isn’t something you receive, and you have debt keeping you from getting ahead, there are options.

If you are looking for advice, or a second opinion about your debt, it does not cost anything to talk about your options. Every financial situation is unique and viable options can differ from person to person. A conversation free of judgment and cost, is the first step to determine options for debt that make sense for you. For a free consultation, please call or text (506) 645-1814 or email jaime@tackledebt.ca; or visit www.tackledebt.ca.