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After dutifully collecting your receipts and filing your taxes, the payoff has arrived: you’ve received your tax refund. It might be a few hundred dollars, maybe even a few thousand.
What to do with this sudden windfall?
After more than two years of pandemic-imposed sacrifice, you might understandably be inclined to splurge. And fair enough.
But if you’re not a spendthrift, what are your best options?
In this episode of the Perspectives podcast, host Stephen Meurice talks to Kingsley Chak, Senior Vice President, Deposits, Savings and Investments at Scotiabank, for his thoughts.
He breaks it down into four categories: Treat yourself; pay down debt; invest; start an emergency fund.
Listen to the episode to get Kingsley’s advice on which debt to pay down first, some investments options, and the importance of planning for the unexpected.
Learn more about how best to spend your tax return on Advice+.
Stephen Meurice: They say the only sure things in life are death and taxes. But at least when you do your taxes, you sometimes end up with a little money back. In fact - according to the Canada Revenue Agency, the average refund for Canadians this year is about two thousand dollars.
But we all know two thousand bucks can evaporate pretty quick. That’s like, what? Two tanks of gas these days? So, what can you do to make the most of your tax refund?
Kingsley Chak is the Senior Vice President of Deposits, Savings and Investments at Scotiabank. Be it a tax refund, a work bonus, or a few hundred bucks from selling that agave blue Stratocaster you bought at the start of COVID and never played. He’s going to tell us the smartest way to use a financial windfall.
Let’s get started.
Thanks so much for being on the show today, Kingsley.
Kingsley Chak: Great to be here, Stephen.
SM: Can you tell us a little bit about your job? What does it mean to be SVP of Deposits, Savings and Investments? Sounds like a big deal.
KC: It's definitely a mouthful. I don't know whether it’s a big deal. At a high level I am responsible for the deposits that Canadians entrust to Scotiabank. My role is making sure our customers the right product to grow their money and be able to use the money to purchase things that they like.
SM: So, you know a thing or two about how people spend their money.
SM: Okay. I want to start by saying it's 2022, we’re into the third year of a pandemic and honestly, I would say if someone just wanted to blow their cash on something that gives them pleasure, I wouldn't blame them. But with that said if someone finds themselves with a few extra dollars say from a tax refund or from something else, what's the main thing that they should be thinking about to spend that money or to use that money wisely?
KC: Yeah. There are a couple of options for folks to spend to use the money. Right? Number one, as you said, if you want to spend it and use it for travel or buy something to reward yourself after a tough two to three years, that's totally understandable. The other option is to pay down your debt. A third option would be use the money and invest it, make it work and create wealth. And lastly, which I think most Canadians probably don't think of is to use that money as an emergency fund. If something were to happen, you have some pool of cash that you can dip into to help with that.
SM: Okay, let's dig into those one by one. The first thing you mentioned is to spend it and I don't think most people have a problem there. The second thing you mentioned was to pay down your debt. I think most Canadians' households have some kind of debt. Many of us have lots of different kinds of debt whether it's card debt or mortgage debt or lines of credit or whatever. How do you know which one you should pay off first or should you be trying to tackle them all at once? What's the best way to handle that?
KC: Yeah, in a recent survey that we looked at, about 23% of respondents say that they're going to use their tax return to pay down debt. And your question of which debt to pay down first is a great one. In short, the principle is pay down the one that has the highest interest. So, if you think about credit cards. Credit card interest rate is between 12% to 20%. And the next one is likely an unsecure line of credit. Which is between you know 4 to 6% range and then your mortgage which is secured. Is probably at this date around the 3 to 4% range. So, if you want to pay down your debt, obviously you want to go with the one that has the highest interest rate because that will save you the most money.
SM: Okay. As I said, everybody has... most people have some amount of debt. Is there such a thing as good debt and bad debt?
KC: Yeah, absolutely. I think a way to think about good debt is debt that you take out that will create future value for you. Think of a mortgage, you're taking out of debt to build wealth for the longer term, right? Like those are typically good debts and a good way of solving a cash flow problem to help you to build wealth. On the bad debt side, if you borrow money and buy something to make you really happy there there's some utility to that. But in general, if you're buying things that you know just add on your payment and doesn't have a whole lot of value, that's probably a little bit of a on the bad debt side.
SM: Speaking of mortgages, let's say you don't have a lot of credit card debt but you've got a mortgage. You know, it might feel like you've got a tax refund of a few hundred or a couple of thousand dollars, that against a mortgage in the hundreds of thousands of dollars that it you know, it couldn't possibly make a difference. It’s just a just a drop in the bucket. How would you respond to someone who, who looked at it in that way?
KC: Yeah, I think every little bit helps. The benefit of paying more into your mortgage is you actually pay down the principle. So, when the principle is lower, you pay less interest on the rate that you're paying. And so, while it might be a small amount — every little bit helps to save the interest down the road. But definitely understand, you know, a typical mortgage is in the hundreds of thousands of dollars, if not in the millions, that's a minor dent. The question comes down to, is there a better way to use that money? And I think one thing that typically we don't really think through is do we have an emergency fund that's saved for a rainy day? And something like that could be very useful and give you a little bit more of a sense of security if something were to happen down the road.
SM: Right. You mentioned that in the list of possible uses for the money. Talk to us a little bit more about an emergency fund. How much should people try and have on hand? What does an emergency fund look like?
KC: It's typically — have a buffer of between three to four months of your operating expenses on a monthly basis as an emergency fund. I would say if you have an emergency fund, invest and put it into something that is liquid and earning you a little bit of interest. A high interest savings account or a short-term deposit, something that you can pull out any time. That's kind of how the emergency fund works.
SM: Right. So, you need to add up all of your expenses, your mortgage costs, your other debt obligations, your groceries, everything else. Add all that up over the course of a month and you figure you need three to four months?
KC: Three to four times, right.
SM: Right. So that's not an insignificant amount of money. Some serious savings you have to do to be able to acquire that.
KC: Yeah. And I think the other way to look at it is in an emergency, do you have access to money and liquidity? So, one way is to have the money in your piggy bank. The other way is do you have an unsecured line of credit in an emergency you can draw on? That's another way to look at it.
SM: Yeah, cause you might suddenly get a leak in your roof or whatever and you need a lot of cash all at once.
KC: For sure.
SM: Okay, the next thing you talked about was putting your money to work. Investing it in some way, obviously tons of options in that space. But what's your suggestion to people with, you know, a fairly modest sum of money but they want to make it work for them?
KC: Yeah, I think saving is top of Canadians' minds. In the survey, you know, 47% of the respondents say they will use it in some form of saving. Be it TFSA, RRSP or RESP and put the money to work. I would say every person's situation is different. This will be a good time to talk to your financial advisors to see what is the right plan and what is the right investment vehicle for you. It also depends on, do you have a large expense coming up? Is this an investment for twenty, thirty years down the road once you retire or saving for a new car? All those factors change what investment strategy you would have.
SM: Okay, so hopefully people will go and see an advisor and get some help. But in the short term can you give us a quick refresher on— you mentioned TFSAs, you mentioned RRSPs. Is there like the thirty-second definition of what each of those things is?
KC: Yeah, we can quickly go through all the registered saving products. The first one is the registered retirement savings plan, the RRSP. So for any Canadian, they can contribute up to 18% of their annual income to that. The amount is tax deductible. So, in a year you'll get more tax return when you contribute and when you retire you take the money out and they will be taxed at that stage. The good thing is by the time you retire, your income will be lower, you'll be taxed in a lower income bracket. That's the benefit. There are two features in the RRSP that are good to know. One is the Lifelong Learning Plan. So, let's say down the road you want to go and take a course. You can take up to $20,000 to dedicate it into your education plan. You need to return that money in 10 years time. But that's a good way to use it to invest in yourself from an education perspective. The other one is the Home Buyers' Plan, you can take up to $35,000 tax free to put as a down payment of your first home. The other one is Registered Education Savings Plan. And so, a lot of the parents out there would have this essentially a savings vehicle to save for post-secondary education. You can contribute up to $50,000 for each RESP plan. And here's the benefit — for individuals that are under 18, there is a Canada Education Savings Grant. Which means the government will contribute up to $500 per year for your kid’s education. And up to seventy two hundred in total. And lastly, is the Tax Free Savings Account. Essentially the money that you put in, you can put it to work and invest and the gains that you get are tax free. So, you don't need to pay tax on that. And so that is very good for both short term and long-term saving goals.
SM: I said at the top that you know, there's a certain value in spending money. I don't know there's value in spending money [laughs] but there's at least sometimes some pleasure to be gotten from it. Do you have any advice on when people can say, ‘You know what, I'm just going to spend this on myself’? Do you have to have ticked all those other boxes off beforehand or…
KC: [laughs] I think everyone's situation is a little different, right? Like taking care of yourself and self-care and self-love is important, right? Like I think it's been a rough couple of years. I know, from the survey, 17% of the survey respondents say ‘I want to spend the money,’ and half of those will say ‘I want to travel and go on a vacation,’ right? It's been a long time to fly somewhere, I think, you know, obviously travel is one big item. If there's anything that gives you joy and you don't purchase, that's another one. I would say think about upgrading your home. For homeowners out there, that may be upgrading the energy efficiency of your home. You’re spending money, your home looks better, get you some return and savings in the future. The other one would be, is there a charitable organization that you want to look at and contribute to. There are lot of things happening in the world and you do get a tax receipt on that which contributes to your next year's tax returns.
SM: Okay, what self-treating do you have on your horizon and can I interest you in a guitar?
KC: [laughs] I'm horrible with music, so it definitely won't be a guitar. I'm a cyclist, you know, the optimal number of bikes any cyclists could have is N+1. And so when there's a tax return, definitely going to look at it to see if an extra bike will be there, but need to get the permission from my wife first.
SM: All right, we'll leave it there. Thank you Kingsley so much for coming to talk to us today. It was really interesting and appreciate you taking the time.
KC: Great. Thanks for having me, Stephen.
SM: I've been speaking with Kingsley Chak, Senior Vice President of Deposits, Savings and Investments at Scotiabank.