Many Canadians receive a tax refund each year. While some look at their refund as an expected or unexpected blessing, for others, deciding what to do with what is often perceived as “free money” can be stressful and confusing.

So what should you do with your tax refund? Treat yourself? Make a hefty contribution to your savings account? Pay off debt?

Your possibilities, your priorities

Money has a way of eliciting emotional responses to these questions. While it’s tempting to go searching for a universal “right” answer, it might be more helpful to take a look at your specific situation—your needs, desires and goals. What can you realistically do with the amount of your tax refund that will most effectively meet your needs, satisfy your desires and help you realize your goals?

Bringing in a financial advisor

You may discover that you want to learn more about your options before making a decision. A financial advisor can provide information and advice that will help you clarify your priorities and make the most of your money. 

Typically, your financial advisor will review your plan and help you determine your short- and long-term savings and investment goals, as well as any other financial priorities—such as going on vacation, helping a family member or taking up a new hobby. 

A note about the relationship between debt and investing

Most financial decisions involve contributing to an investment plan and/or paying off debt. Unless you decide to meet an immediate need or want using your tax refund, you and your advisor can strategize about how to best:

• Pay down your debt and reduce your costs of borrowing
• Maximize returns on your investments

While the typical investor approaches building their savings and repaying debt as two separate objectives that are independent of each other, in reality, debt and savings are inextricably tied.

Reducing your debt isn’t just a way to increase your net worth, it also saves you money in the long term by decreasing the amount of your monthly interest payments. You can also save by reducing your cost of borrowing and consolidating higher-interest debt (such as credit card debt) into a lower-rate loan or line of credit. Reducing interest payments improves your cash flow and allows you to redirect funds into your savings account or investment plan—where that money will be earning interest instead of accruing it. 

The bottom line

Even the best financial advisor can’t decide what you should do with your tax refund, or any other influx of money. Analyzing your own big picture is the best first step to making a smart financial decision that aligns with your goals and takes the reality of your life into account. If you need additional information, or just want to talk to someone with insight and experience, a financial advisor can help you determine how to translate a financial goal into a financial strategy. Regardless of whether you seek expert advice or make this decision on your own, remember that debt and savings are two sides of the same coin, and that getting ahead financially sometimes means snowballing debt or paying off a credit card instead of buying a GIC or investing in mutual funds.