It's not the most exciting idea, but rather than splurge your tax refund on a shiny new toy, why not pay down some high-interest debt or get started on next year's contribution a little early?
This is my plan but, to be honest, for the first time in years I have no idea where I want or should invest such things.
I'm always a little amazed how easy it is to backslide when it comes to certain things – whenever I stop running, the months (years) of hard work to build up my capacity to run long distances evaporates in a month. Money knowledge seems to be like that too.
Happily, there are resources available to help you decide where to put your cash account assets, whether we're talking about new contributions for next year or those you made earlier this year.
First, it pays to understand
time horizons,
diversification and
asset allocation. If you're truly a newbie or if you truly don't care about such things, go to the bank and get someone to explain it to you.
Financial advisers are good for this too, just keep in mind that not all advisers have access to all products. I've met a number of really excellent advisers over the years but I've also crossed paths with quite a few who were intent on selling me grossly overpriced, pre-packaged, one-size-fits-most balanced products that weren't quite right for my needs.
Don't get me wrong here – I am absolutely in favour of getting an expert's help if you're not comfortable managing things yourself. That said, I think it's pretty vital to do your homework to find the right expert.
Ask questions, work to understand your options and ultimately take responsibility for the decisions made in your portfolio.
Once you've done an analysis of your needs (Are you investing for retirement or are you investing for a shorter period of time?) you can better understand what sort of mutual funds you're looking for.
Personally I look at a fund manager's track record – at his or her three, five and ten year returns if those numbers are available, and at the fund's
management expense ratio (MER).
It's been on the shelves for a while now but the latest MoneySense magazine has a ranking of Canada's best mutual funds in it this month. (You're looking for the February/March issue – it's on stands until May 9.) The charts inside provide all of this information.
For further digging, I also enjoy trolling
Morningstar Canada to get reports on funds I own already and to research additional options. It takes some getting used to, but the site's fund selector allows you to search by fund category, load type (I'm usually a fan of buying no-load, read: zero commission funds from the bank since these generally have lower MERs.) or by ratings and returns. Once your results are in, the site also allows you to sort the list and click on each fund to get more complete information.
Finally, do try to read a mutual fund prospectus to get a sense of what's in them. They're dreadfully long, dull, fine-printy things, but with a little bit of practice you can skim and skip most of it to find the important parts.
In my mind, these are fund specific details on what the manager invests in and why, management fees, information on who the fund is designed for and any related risks. The more generic sections on fees, expenses and dealer compensation are also key to understanding how these things are made and paid for – you might only need to read these sections once.
Finally, understanding the section on purchases, switches and redemptions is particularly important if you expect to need the money sooner than later (early withdrawal from some products can be quite costly).
Kate McCaffery is a freelance writer in Toronto, Ontario. Visit mccaffery.ca/kate2.0/ for more information.
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Smart Ways to Spend Your Tax Refund
1. Pay down credit card debt.
OK, so this doesn't sound as appealing as a new flat-screen TV. But if you can knock out -- or knock down -- the balance of even one high-interest credit card, you're making money. Think of all the interest you won't be paying.
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Smart Ways to Spend Your Tax Refund
1. Pay down credit card debt.
OK, so this doesn't sound as appealing as a new flat-screen TV. But if you can knock out -- or knock down -- the balance of even one high-interest credit card, you're making money. Think of all the interest you won't be paying.
Smart Ways to Spend Your Tax Refund
2. Open an RRSP.
Or, if you already have one, use your refund toward your annual contribution. Been putting this move off until you had "a little extra money?" Today's your lucky day. Any amount "will compound nicely," says Chris Farrell, author of "Right on the Money."
Smart Ways to Spend Your Tax Refund
3. Take stock.
Historically, stocks have produced nice returns, and even a few hundred dollars can get your nest egg off to a nice start. "The biggest mistake people make is thinking (what they have) is too small an amount to invest," says Ric Edelman, author of "Ordinary People, Extraordinary Wealth." "Rich people start off as poor people. The difference is they take the nickels and dimes and they invest it -- they didn't spend it all at the mall," he says.
Smart Ways to Spend Your Tax Refund
4. Set up a rainy day fund.
"Most people have a chequing account and a savings account," says Farrell. "I like for them to set up a separate mutual fund account."
The money is there in an emergency, but because you can't just empty it out by writing a series of little cheques, you're less likely to touch it. The standard rule of thumb is to sock away three to six months of living expenses. So start with your refund and take it from there.
Smart Ways to Spend Your Tax Refund
5. Refinance your house.
Rates remain low, so if you've been looking at refinancing, your refund offers a piece of change to put toward closing costs. Depending on the deal you get with your lender, your refund might not cover the whole cost, "but it could take care of a nice chunk," says Farrell.
Smart Ways to Spend Your Tax Refund
6. Add to your mortgage payment.
"For most people, a lump sum payment toward your mortgage is better than putting it in a savings account," says Robert Van Order, adjunct professor of finance at the University of Michigan.
Smart Ways to Spend Your Tax Refund
7. Spruce up the homestead.
Thinking of a do-it-yourself landscaping or remodeling job? Take the tax refund and get a professional to sketch out a plan for you to follow. For a few hundred dollars you will know exactly what you're getting into and how much of it you want to do yourself. Plus, increasing the value of your home puts extra equity in your pocket.
Smart Ways to Spend Your Tax Refund
8. Auto details, details, details.
Planning on selling your car anytime soon? "Getting your car detailed can make a huge difference if you are putting it up for sale," says John Clor, of Ford Communications Network. A thorough job, which costs about $175 for detailing inside and out, could increase the price you get by as much as $1,000, says Clor.
Smart Ways to Spend Your Tax Refund
9. Service your car.
"The No. 1 thing people forget with cars is to maintain them," says Clor. If you've been putting off that oil change and tuneup because you just didn't have the money -- this is the time. And check the tires. Extra bonus: A well-maintained car with properly inflated tires burns less gas and saves you money in the long run.
Smart Ways to Spend Your Tax Refund
10. Get the star treatment.
If you've had your nose to the grindstone all year, your refund could be a way to give yourself a much-needed treat. A full day at a local spa, a dinner at the best restaurant in town or tickets to a show you've been wanting to see for months could be the perfect way to give you a new, and better, outlook on your life.
Smart Ways to Spend Your Tax Refund
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