Ideas for how to spend your tax return

The spring weather may be on its own schedule, but if you filed your taxes in April and you’re getting a return, that should be in your bank account by now.

What will you do with it?

Tax returns are a funny thing – it’s money you made during the year, returned to you at tax time. It’s like finding a crisp $20 bill in your pocket when you switch coats. It’s your money, it just wasn’t in your pocket for a while.

Regardless, when you get your return, you now have a little bit of extra funds sitting in your bank account. Here are three options for where to put that newfound money:

Pay your credit card

Why? You can spend your money however you want – no judgements here. But if you carry a balance on your credit card, it’s known as bad debt. Credit card debt is bad because of the whopping interest rates credit card companies charge – most upwards of 20%!

Return: It’s unlikely you can invest in anything that would give you a greater return than by paying your credit card debt and avoiding a monster interest charge. So before you invest in anything, clear as much bad debt as possible.

Dump it in your retirement savings

Why? If you want to take the long view on your savings – thinking beyond the next couple years – dumping your return directly in a retirement fund makes sense. In Canada, that’s an RRSP, pension or other savings plan.

Return: It depends on what stage of your life or career you are contributing in. Earlier is better - $1 saved in your 20s works out to be the same as $10 in your 50s. The only caveat here is once you’ve put the money into a retirement fund, it typically can’t come out until retirement.

Start an investment account

Why? Robo-advisors – we’ve talked about these in the past – are an interesting way to save. Putting your investments on autopilot will appeal to anyone who lacks the wherewithal to manage a portfolio, or who is too busy to check their stocks app throughout the day.

Return: In Canada, the financial instrument in these digital brokerages are index funds, which go up and down with the stock market. You can withdraw from these accounts, but it usually takes some maneuvering over a week or two.

Try a high interest savings account

Why? High interest savings accounts or HISAs are a risk-free (at CDIC-insured institutions, anyway) option for your return. Putting money into one of these accounts – like, ahem, the EQ Bank Savings Plus Account – can net you interest without worrying about any market shocks. They are also easy to open. For instance, the EQ Bank Savings Plus Account takes about five minutes to open.

Return: HISA returns are competitive among banks, but don’t match an investment windfall. Less risk, less reward. But it will never go down, and you’re able to withdraw your money at any time.

Spend it on whisky and old records

Why? You only live once! But seriously, if you are going to invest, these are two assets that can age well if you know how to pick the right ones. For instance, the market for high-end whisky has exploded in the past 10 years, with triple digit returns on some bottles. And if you can dig through your record store discount bins and find an alternate pressing of Bob Dylan’s second album, The Freewheelin’ Bob Dylan, it would be worth upwards of $35,000.

Return: Taking this outsider approach to investing your tax return is not the easiest path to a return on investment – it would take more time, effort and luck than simply using a financial instrument to invest. Then again, don’t discount the intangible return you could enjoy by sipping a whisky and listening to Dylan for an evening.