You may be one of many Australians who make an interest-free loan to the federal government every year. That’s because, when you receive a tax refund, you’re not getting free money. All that’s happening is that cash which is rightfully yours is being returned, somewhat late. So it makes sense to make it work as hard as possible once it’s back in your hands.
You could, of course, simply spend all of your refund on updating your phone or taking a holiday, but while that may be fun, it’s not particularly smart. A much better idea is to use at least some of your refund in a way that will help you to afford more than one holiday and new phone in the future.
Eight Financially Savvy Ways to Use Your Tax Refund
1. Pay down any high-interest debt
If you have any high-interest debt – especially credit card debt, where you may be paying 20% p.a. or more – using your tax refund to reduce the amount you owe should be your first priority. Getting rid of debt will free you to start investing in your future.
2. Invest in yourself
There’s no better investment than your own education. Improve your employability and earning power by adding to your skills and qualifications via relevant professional courses. You may even be able to increase next year’s tax refund by claiming a self-education deduction for the cost of a course which makes you perform better in your current job.
3. Add to your super
Your employer makes mandatory super contributions on your behalf, but that doesn’t stop you making your own additions to your super balance. You could ask your employer to make tax-effective super deductions from your pre-tax income, using your tax refund to offset your reduced take-home wages. If you are a low to middle income earner, you could even score a $500 gift in the form of a super co-contribution from the government.
4. Aim to spend time in the market
Using your tax refund to start or add to an investment portfolio is extremely smart. Thanks to ETFs and managed funds, it’s easy to squirrel away a $1,000 tax refund and leave it to turn into around $3,900 after 20 years (assuming an annual growth rate of 7%). If you did this with $1,000 from your tax refund every year, you’d have a very satisfying $43,865 after 20 years.
5. Set up an emergency fund
Don’t sit on your tax refund in lazy cash that isn’t earning interest. If you put it in a high-interest savings account it will still be readily accessible to cover any emergency expenses that may occur, such as unexpected medical bills or car repairs.
6. Reduce your mortgage interest
Better still, if you have a mortgage with an offset account, park your tax refund in the offset account until you need it. The interest you will save will nearly always be far greater than any interest you could earn in a savings account.
Or, if you’re feeling financially confident about the future, use $1,200 of your refund every year to make extra mortgage repayments. An extra repayment of $100 every month on a 25-year loan of $500,000 at 6% p.a. could save you more than $36,000 in interest during the loan’s term.
7. Save money by paying annual bills upfront
If paid in a lump sum upfront, large annual bills – such as property, car and health insurance premiums – can cost significantly less than 12 monthly repayments. This is because the billing company will add fees to monthly repayment amounts to cover the loss of the use of your cash, and the greater likelihood that you may bail during the year if you haven’t already paid in full.
8. You can still have some fun
All work and no play makes Jack a dull boy, and your tax refund equally boring. So by all means spend some of it on adding a bit of excitement to your life. Just don’t totally deprive yourself of the long-term enjoyment of using money you didn’t know you had to build a solid financial future that is within your grasp.
Your financial adviser has lots more ideas
Anyone looking for shrewd approaches to using their tax refund should consider speaking with one of our advisers You’ll find they have plenty of clever suggestions that will add to your enduring wealth.
