Put tax return to work

Please put that tax return to work

May 13, 2016

On Monday the Free Press featured an article on the large number of people who were late on their income tax filings this year. But I know you were not one of them – my readers are always on time.

In fact, chances are you already received your refund, if you were expecting one. Hopefully, you have a great plan for it, which help you be more financial secure, and possibly even save you taxes this coming year.

Yes, there are great things to do with your tax refund, like pay off high interest rate debt, make an RRSP contribution (if you are in a tax bracket where you can benefit), make an investment within your TFSA and, of course, spend some on yourself. (Or your spouse’s birthday present, as I did this year.)

But let’s take this one step further – let’s right now set a savings and investment target for this year. The tax refund can be part of it, but you will also need to commit money from your regular sources of income.

Think about the amount you can commit each month to long term savings (RRSP, TFSA, pension plan) and how much to shorter term goals, like vacation, annual insurance or property tax payments, home repairs and improvements and other one-time expenses. (Yes, Virginia, it makes sense to save for all these things rather than use credit). You also want to save for bigger goals like a house downpayment or new car.

Now, match up those amounts with appropriate investments. What I mean here is the time frame for the goals, as well as matching your particular risk tolerance.

For short term goals, you can’t take any more risk than a savings account, term deposit, GIC or bond with an appropriate maturity date. Yes, I know, they pay almost nothing, but they will also not decline in a market correction.

When your time horizon is clearly five years or longer, then you want to participate in the ownership of great companies. This can take the form of direct ownership of stocks or trust units, or investment through managed vehicles like mutual funds, pooled funds or ETFs (exchange traded funds).

These will go up and down along the way, but are likely to earn more in the long run. Committing to investing a set amount each month makes those fluctuations work in your favour.

Remember, the key to achieving your financial goals are:

1. Set and write down specific goals.

2. Figure out what is needed to reach them, in terms of debt reduction, savings or changes in behaviour.

3. Put that plan into action.

4. Measure your progress regularly, and adjust or increase your activity.

5. Celebrate your success and enjoy!

The average refund this year may be in the range of $1,800. I can’t find new data, so I am just extrapolating from the last few years. You have heard me say in the past that getting a refund means you loaned money to the government interest-free throughout the year, and that the real goal is to reduce your tax withholdings at source, such that you keep that extra money and invest it during the year.

However, if you are requested to pay quarterly instalments, pay close attention to that request. If you are late or miss an instalment payment and you then end up owing money next year, you will be charged interest and penalties. These are much higher than the amounts you are likely to earn on investing that money in the interim.

On the other hand, if your requested instalments are too high because you had unusual income last year that will not be repeated, you can pay less than requested, provided you are absolutely certain you will not owe on next year’s filing.

Bottom line - if instalments have been requested, it is best to pay at least enough to ensure a small refund on your next tax filing, and avoid a balance owing.

Refund or not, cash flow planning is the most important tool you have to help you achieve your financial independence.

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice. Please consult legal, tax, insurance and investment experts for advice on your unique situation.

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David Christianson, BA, CFP, R.F.P., TEP, CIM is a Certified Financial Planner and senior advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.