Dale Jackson

Personal Finance Columnist, Payback Time

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ANALYSIS: Over half of the respondents in a recent poll by Environics Research Group said they expect to get some sort of tax refund this year. If history is a guide, the average refund will be about $1,500.

That may seem like a windfall but it has always been your money. It was likely over-deducted from your pay by your employer throughout the year.

The question now is: do you blow it on something fun or spend it wisely? If you want to be smart here are two ways to make that $1,500 count.  

Pay down debt

According to credit rating agency TransUnion, Canadian consumers carry an average debt of over $21,000 (not including mortgages). Much of that debt is the balance owing on a credit card. Some credit cards charge interest as high as 30 percent. Major credit cards like MasterCard and Visa have interested charges in the high teens.

Using a 20 percent interested rate compounded daily, the interest on $1,500 after one year is about $330.

As time goes on, the principal - plus interest - generates more interest. That interest generates more interest, and so on.

At a rate of 20 percent that $1,500 would generate interest of $2,580 in five years.

In 10 years the interest paid would be nearly $10,000.

That $1,500 - in a sense - becomes $10,000 when applied against debt.       

Contribute to RRSP

Recontributing a tax refund to your registered retirement savings plan can boost returns in two ways.

Refunds vary from income level to income level, and province to province, but if an Ontario resident making $70,000 contributes $1,500 to an RRSP the tax refund would be about $470.

You can supercharge that refund by perpetually re-contributing refunds. Under the same circumstances a $1,500 contribution would generate tax savings totaling $700.

Your $1,500 could result in $2,200 in savings.