Make the most of your tax refund!

Ashleay: Welcome to the “In Your Interest!” podcast. My name is Ashleay and this week Sébastien and I are talking with our colleague Pablo Carrera about a seasonal topic: tax refunds. How can we make this opportunity profitable? Hi everyone! Thanks for sharing the microphone with me this week, Pablo and Sébastien.

Pablo: Hello, hello. Glad to be back. Thank you!

Sébastien: Hello Pablo. It’s good to have the man with the golden voice with us this morning.

Pablo: Haha! Thank you very much.

Ashleay: So, Pablo, I was reading this week that in 2022, the federal government gave taxpayers an average of about $2,092 in tax refunds. But with inflation, we know that that $2,000 disappears pretty quickly. What would you do to make the most of your tax refund?

Pablo: Yes, that’s a great question, Ashleay. And, actually, taking the time to ask that question really allows you to put that money to work. For starters, if you receive a tax refund, the best strategy is obviously to use it to improve your financial situation. Mr. Buffett has said in the past: “rule number one: never lose your money. Rule number two: never forget rule number one.” Having said that, we often talk about the impact of the tax refund because we do our taxes, we get a refund somewhere in March, April, May, and sometimes we lose sight of the fact that there’s a second opportunity later in the year—in early summer, somewhere in June or July—where the government uses those RRSP contributions and that tax return to recalculate some of your federal programs, some of the credit programs, like family allowances, GST and QST refunds, which bring a second opportunity down the road, later in the year, for you to have another benefit from that RRSP contribution.

And most people are just not aware that that’s another opportunity to be able to sit down with your advisor and get some better advice. I like to think of it as two separate opportunities in the year where this tax refund gives you a benefit.

Sébastien: Yes. And, as you mentioned, clean up your financial situation by paying your debt, investing or whatever. But here, it’s about positioning yourself, as an individual, to benefit from what we’ve mentioned on multiple occasions on this podcast as being one of the strongest forces in the universe, which is compound interest. So investing at every opportunity that you have is a very good general rule of thumb for financial wellness throughout your life.

Ashleay: And if we go back to that Warren Buffett rule—never lose money—how do you avoid losing money? Do you have a few solutions to suggest to our listeners?

Pablo: Yes, absolutely. In fact, when we talk about losing money, it’s important to keep in mind how we define debt because debt has some negative connotations. We’ll get back to that in a second. First, obviously the primary course of action is to pay off the costliest debt that you have. Paying off your higher interest rate debt would be a priority. We often think of mortgages as the biggest debt that you carry, but you have to realize that that debt is also usually at the lowest interest rate. So, that may not be the one that you necessarily want to prioritize paying off the fastest. Then you’ve got some other ideas. Things like contributing to your RRSP. This will have a multiplying effect down the road. It also allows you to compound the effect of a tax return for the following year. Registered education savings plans—RESPs—allow you to have a second go at a financial return because obviously you get a return from your RRSP contribution and then, when you put that return to work in your registered education savings plan—in your RESP—you get government grants. So that’s a second way of having that money work for you some more. Things like a TFSA allows you to compound at a tax-free rate over a longer period. And this year, we also have the FHSA—the first-time home buyer savings account—where you get an immediate tax benefit, an immediate tax deduction and, as well, the ability to compound over time, tax-free for the purpose of buying your first home. So there are lots of opportunities to be able to not lose your money.

Ashleay: And in your first point, to pay off your debts, how do you know if it’s a good debt? And is there such a thing as a good debt?

Pablo: There is. In fact, that’s the idea behind evaluating how your debt works for you. There is debt that has a lower rate of interest, for example. There are opportunities to use debt for investments. There are also different types of debt that will come at a higher cost. And I think the evaluation of not only the cost of debt—in other words the interest rate—but the opportunity cost of what you can do with that money is a conversation that you really need to have with your financial advisor. Because an advisor who sits down with you and takes the time to understand your situation, your objectives and your goals will be able to give you advice on which debt to pay off first and perhaps which to continue carrying because it can add value to your net worth.

Sébastien: Yeah, it’s about personal accounting, in a sense. The debt needs to create an asset. Oftentimes you borrow to invest in something that is fiscally beneficial. The asset is pretty obvious there. But you know, going into debt for education purposes, for your skill set, maybe even for a life experience that can impact your future trajectory for income, becoming a more complete human being (in large quotes here). There are all kinds of debts that are beneficial in the end.

Ashleay: Absolutely. So I was going to say using my tax refund to travel isn’t the right option… but if we consider that, it could be. Right? What do you think, Pablo?

Pablo: Exactly. In fact, there is a lot of worth, a lot of good in being kind to oneself. And in the current state where one works very hard to earn money and improve their situation, from time to time it’s very good to treat yourself to something nice, whether it be a smaller vacation or an evening out. Basically, be kind to yourself and you will find that you’re able to do that while staying on track with your goals of savings, investing and reaching your mid- to long-term financial goals. But by all means, dedicate some of that money to you. That is just as important as paying off your debt.

Sébastien: So it’s about not creating anxiety by thinking about the best practices for savings. It’s about having a plan that makes sense, that’s realistic, and that you revise as you move forward in life, adjusting the plan as you go.

Ashleay: Ya.

Pablo: Exactly.

Ashleay: And now how much to invest and where, when and what? That’s the golden question, right?

Pablo: Exactly. And this is where we get to the point where you’re going to really benefit from having good advice. Because there’s no one-size-fits-all solution. There’s no magical formula. And you really benefit from having an advisor getting to know you, understanding your objectives, understanding who you are as an investor. Your investor profile is the starting point of just about every conversation.

In terms of how much to invest, that will really depend on your situation. If we look at where and when and what, obviously, we favour a more diversified approach. We favour an approach that takes into account reducing risk as much as possible. We’re going to look at fixed income products. We’re going to look at stocks, at equities. We’re going to look at the funds that are available in the market that do both of those things. And a good fund, managed by a good manager and recommended or chosen by a good advisor for the right client is the perfect combination.

In terms of when to invest, the best answer I can give you is: always! And I’m being very serious! I go back to the three golden rules of investing, which we constantly repeat, which are : Patience, in other words, stay invested. Diversify, meaning do not concentrate in one area or in one sector, and certainly not in one fund. Invest often, make sure that you invest regularly because markets will move and they never move in a straight line. They will always fluctuate—that is the very nature of a market. By investing regularly, you benefit from that fluctuation and a good advisor will put you on a regular investment plan that will allow you to benefit from the fluctuations of the market.

Those three golden rules, I think, have the most value for somebody who’s wondering: “How should I invest? When should I get started? Where should I put my money?” Sit down with your advisor and remember those three rules: stay invested, stay diversified and invest regularly.

Sébastien: And it’s that simple, right? To win in the end. Because you hear people say, “I made a killing” in this stock or this sector this year or this investment, but, of course, you don’t hear about the investments that didn’t pan out. So, if you want to win in the long run, it’s about playing the long game and taking advantage of compound interest. Because if you lose 50% on an investment, you need to make 100% on the next investment just to break even. If you can avoid these large fluctuations, in the end you set yourself up for lots of success on the little effort.

Ashleay: Absolutely. And is it possible to mention the investments that you are currently looking at, Pablo and Sébastien, while I have the both of you with me? If you want to keep up with current events, which stocks would you prioritize for Q2 2024?

Pablo: Certainly. In the current environment, there are some trends that—you know, without having a crystal ball, without being able to predict the future—we see happening. For example, we expect that interest rates will start to decline. We don’t know exactly when, we don’t know by how much, but we expect the rise in interest rates that we experienced over the last few years to come to an end and to start to normalize. When we say that, obviously that creates opportunities on the fixed income side, on the bond side. We see opportunities in the sectors that have been less in favour over the last few years. And it would be a mistake to not have bonds and fixed income in your portfolio because of what has happened over the last few years. On the equity side, we see opportunities. Obviously, we tend to look at it from a risk management perspective as well. So, we’re going to favour some of the dividend funds and the dividend stocks. We like to favour these because companies tend to be larger, and the dividend adds this level of security to the portfolio. And obviously going back to those three golden rules, staying diversified being one of them. I can’t tell you whether it’s going to be technology that’s going to lead again in 2024, I can’t tell you whether it’s going to be healthcare, but I can tell you that you should definitely be invested because that is the best way to reach your financial objectives.

Sébastien: I completely agree with you. I cannot say it more. And the geographical dimension is very important here. If you want to be exposed to the chip makers, the semiconductor team, you’ll find that mostly in the US but also in Asia. Japanese equities are where momentum is blowing the strongest right now, so you want to have exposure to that. Again, being well diversified on all dimensions, that’s the advice for 2024.

Ashleay: Absolutely. Well, thank you so much Sébastien and Pablo. And thank you to our audience for listening to us. Don’t hesitate to reach out if you have any questions or comments, we always love to hear from you. Thank you. Loved this podcast? Want to know more about economic news? Follow our “In Your Interests!” podcast, available on all platforms. Visit the economic news page on ia.ca or follow us on social media.