Category: Meridian GoodSense

What to do with your tax refund

Saving is the way to pay yourself back, over and over

At the risk of taking the fun out of tax season – stop laughing, keep reading – I suggest that you devote your tax refund toward savings.  Okay, spend some, but allow me to make my case for making saving your first priority.

A tax refund is a kind of forced savings already.  In essence, the taxes that were withheld over the course of last year were more than necessary to fulfill your annual income tax obligation.  Once the full calculation has hit the books with the filing of your tax return, the government sends back that overage.

Commonly for those whose income is mainly employment-related, the refund arises due to RRSP contributions.  Your employer would have reduced its withholding where it knew about contributions to workplace pensions and RRSPs, but it would not have known to do that for RRSP contributions you made outside of work.  For example, at a 40% tax bracket, a $1,000 contribution to your own RRSP reduces your reportable income by that amount, so you have $400 coming to you.

As well, you likely made RRSP contributions in January and February, and are allowed to apply those contributions against last year’s income.  Assuming so, that gets you your tax break as early as possible, but let’s pause and think about the mechanics involved in that.

For those workplace RRSPs, you are using some of your 2018 income to reduce 2017 income, in effect paying last year’s taxes with this year’s income.  That can put growing pressure on your cash flow from year to year, and put you in an especially difficult bind if you lose your job.

At a minimum, save the refund related to those first 60 days, whether it’s simply set aside in a tax-free savings account or it goes as a further RRSP contribution.  If it is the latter, your larger refund next year can help reverse you out of catch-up mode with your taxes.  Supplement that with the refund from your other RRSP deposits and you’ll be ahead on both your taxes and your savings.

Like gramma’s shortbread, financial advice needs the human touch

My gramma – yes, that’s how I spell it – was an amazing baker.  My mom was an amazing baker.  Me?  Well, I do my best to pay homage to that pedigree.

In preparation for our wedding, my wife and I decided we would make “Gramma’s Shortbread” as a truly personal bomboniere for our guests.  But try as we might, our results were more granular and chewy than the melt-in-your-mouth memories I had from my childhood.  So I called my mom for advice.

“Dear,” she began, “a mixer is a wonderful appliance, but my mom only had the strength of her fingers and the warmth of her touch.  Put away the beaters and use your hands.”  It turned out great, though I’ll concede that it wasn’t quite as good as mom’s or gramma’s.

Financial advice is personal

In our high-tech world, it is tempting to believe that tools can replace people, even in something as personal as your family’s financial future.  But like the electric mixer, tools are only as useful as the skilled hands operating them, and often the most important part of the exercise is the human aspect.

Despite having the ingredients and recipe in hand, we needed guidance to fix our shortbread.  A phone call to my mom sufficed to rescue our five-ingredient foray, but with all due respect to bakers, there are far more inputs and far greater implications in the field of personal finance.

It is asking much more, and arguably too much, for mere phone, web or email contact to be an adequate connection between you and your financial advisor.  If it’s about your personal needs, shouldn’t that professional relationship have a personal element to it?

Why the relationship matters

A financial advisor works with you, not on you.  At a minimum your advisor must have the training, licensing, financial tools and access to products and services that can fit your financial needs.

Beyond that, you need to connect with the person.

This will give you the comfort to be candid about yourself and your desires, so that you obtain advice appropriate to your circumstances.  Equally important, you will then have confidence in the recommendations you are provided, while remaining conscious of the need to evaluate them on their technical merits.

From recipe to results

Once you have come to a decision, it can still be an anxious moment to get going.  Remember though, that like a recipe on an index card, a plan is only paper until you put it to work.

One character trait that is critical for a financial advisor to be effective is the ability to motivate people to take action.  It is a skill that builds through professional experience, and the more you can observe and appreciate it, the more inclined you will be to trust and act on it.

After that, the continuing human contact you have with your advisor will allow you both to monitor developments and make any required adjustments, so that you remain on track.

The value of financial planning

Yogi Berra, and knowing where you’re going

Financial planning is a relatively new field, having gained recognition and adoption over the last couple decades. It is a gathering point for personal economic activities that in the past may have been viewed and pursued in isolation from one another.

Still, you may ask why it is needed. While you can appreciate that planning is generally better than not planning, there has to be a payback. To the point, what is the value of financial planning?

In response, we’ll channel the insights of Yogi Berra, the all-star catcher with the New York Yankees who was equally well known for his verbal exploits off the field. He was the king of malapropisms, summed up in his own words(?) in the 1998 biography, “I really didn’t say everything I said!”

What’s your vision?

The best of the Yogi-isms combine a dash of humour with a dose of common sense, though usually expressed in uncommon ways. One of the classics is his advice on being prepared: “If you don’t know where you’re going, you might not get there.”

Of necessity, everyone has to first make ends meet, particularly young people early in their careers. As you get more established, the financial stakes rise, as does the complexity of life. This can be challenging and stressful to keep on top of, and could have you scattered in all directions.

By asking and requiring you to consider why you are doing things, financial planning leads you to form a vision of where you are going. This allows you to be more efficient with your limited time and energy, revealing gaps and opportunities that might otherwise be missed, while keeping focus on a tangible target.

Be coordinated

While running spring training camp in his later career as a Yankees coach, Berra is reputed to have directed his players to “pair up in threes.” While there is some debate whether this was simply attributed to him, it does emphasize how failed coordination can lead to confusion.

Properly undertaken, financial planning dispels confusion. It helps identify, organize and unify the components of your economic life, spanning budgeting, saving, investing, and tax management. What’s more, it informs those kinds of technical skills with the needs they serve, from education to career choices, on into retirement and through to estate planning.

It provides coordinated purpose so you can achieve the vision you have for yourself.

Make adjustments

Quite apart from his mirthful messages, Yogi truly was a great athlete, having won a record 10 World Series rings as a player, and 3 more as a manager.

As a catcher, he had that unique behind-the-plate vantage point to survey the entire field of play. Yogi was a master at sizing up the next batter coming up to the plate, and directing his teammates into the best position to respond to that next challenge.

In similar fashion, financial planning puts you in better position to recognize when things have changed, and to make adjustments to bring you ever closer to realizing your vision.

Get started

Perhaps most famously, Yogi quipped, “it ain’t over until it’s over.”

With a little poetic license, you could also say, “you ain’t started until you’ve begun.” More simply put, financial planning has value at all stages of your life, so it is never too early or too late to begin the journey.