Put your Financial Windfall to Good Use

Put your Financial Windfall to Good Use

By, Carla Hindman, Director of Financial Education, Visa Canada

Statistics say that the odds of winning the lottery are about the same as being struck by lightning. But for most people, there are many other, smaller financial windfalls that are much more likely to occur- everything from tax refunds or inheritances to a raise or bonus at work.

The question is: when you do find yourself in possession of some extra cash, what precautions can you take to ensure that the extra money isn't washed down the drain? Here are a few suggestions:

Consider the whole picture. Before going on a spending spree, stash the money in savings until you've examined your total financial picture. Weigh existing debts, upcoming expenses and future needs (like retirement or potential renovations) to make sure you apply the money where it's needed most.

Minimize your taxes. If you routinely get large tax refunds, you're giving the government interest-free loans. Instead, review and update the TD1 Personal Tax Credits Return form that is filed with your employer to calculate how much is being deducted with the goal to break even on next year's taxes. Doing this can put that money to work for you now, rather than relying on a big refund cheque later.

Pay off debt. Usually the best choice when extra money comes your way is to pay down high-interest debt, like credit cards, a car loan or student loans – although note that student loan interest may be tax-deductible.

Save for emergencies. Experts recommend putting aside three to six months of living expenses in case you lose your job or experience other unplanned life events. Consider putting the money in a Tax-Free Savings Account (TFSA): a flexible savings account that allows Canadians to earn tax-free investment income to meet their future needs.

Save for retirement. Many Canadians chronically underfund their retirement savings. One relatively painless strategy is to put part or all of your financial windfall into a Registered Retirement Savings Plan (RRSP). It's easy to have the money automatically withdrawn from your paycheque and the tax advantages will make your savings grow even faster.

Finance College/University. If you have kids, you're probably already worried about paying for post-secondary education. Although your own retirement security should come first (you can always borrow for education, but not retirement), if you do get a windfall, consider opening a Registered Education Savings Plan (RESP). Anyone, including your kids, can contribute – and the government even offers a match (up to a certain percentage).

Budget. Once you've used your windfall to pay off debt or start a savings plan, don't slip back into bad habits. Create a budget to keep your expenses routinely allocated. Practical Money Skills has a number of calculators available to help you track income and expenses so you can save for long-term goals like buying a home, getting a new car or paying for post-secondary education.

As always, it's important to consult a financial professional regarding your particular situation and don't forget to reward yourself for having the discipline to use your financial windfall wisely. I like the 90/10 rules, where 90 per cent goes for debt payoff or savings and 10 per cent is to splurge on something fun.





This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.

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