May 7, 2018

Pay debt or invest? How to use your tax refund

Fewer people are spending their tax refund on luxury items, and instead are focusing on smarter ways to use it like investing and paying off debt. This raises the question, which is the better option saving or reducing debt? If you have credit cards that have high-interest balances, the answer is simple: pay these first. If, however, you are carrying low interest debt and have investment opportunities that in the long term can bring you a greater rate of return, then it may make sense to invest.

Key Takeaways:

  • Any high-interest debt, such as a balance on a credit card, should be the priority.
  • Compare the interest rate you’re paying on your debt with the expected after-tax rate of return of the investment, and also consider your financial picture if the investment falls short or you end up losing money.
  • If you can tolerate some risk and have a long enough time horizon before retirement you may benefit by skipping extra payments on low-interest debt and instead making contributions to an RRSP or TFSA account.

“The decision is trickier when it comes to debt with less onerous interest rates. Mortgages, home equity lines of credit or car loans may carry much lower interest charges.”

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