Most Australians receive a tax refund, but not all spend it wisely. Here’s how to make the most of your tax windfall – and not blow it all in Bali.
It’s now October, and we have already lodged most of our clients individual tax returns. Were you lucky enough to get a refund? It’s an exciting time!
After all, eight in 10 Australians get a tax refund according to the ATO, with an average of $2,574 being handed out per person.
So it’s important you have a plan for that money.
What others do with their refund
Sensibly, and perhaps a little surprisingly, only one in ten Australians go large and either spend their tax refund on holidays or big purchases.
The rest of us? Well, we tend to put it to pretty good use.
Almost 30% of Aussies use their tax refund to pay outstanding bills or fines.
After bills, one-in-five put it towards savings, one in eight pay off loans or credit cards, and one-in-ten put it towards their home loan.
But there are effective ways to do these things, and not so effective ways, as we’ll discuss below.
What you could do instead
1. Pay off high interest debts
If you use your refund to pay off a high interest debt, you could save money over the long run and may become debt free sooner.
Have a look at your debts and see which has the highest interest rate – whether it be your credit card, your mortgage, or a personal loan – and consider paying that off first.
2. Save, save, save
Putting your money into a high interest savings account can make your refund go further.
If each year you put that average $2,574 tax return into a high interest savings account with a rate of 5%, in just five years you’ll have $17,508 – that’s almost an extra $5,000 in compounding interest.
Not bad for minimal effort.
3. Boost your super
The government estimates that the lump sum needed to support a comfortable lifestyle for a couple entering retirement is $640,000 (or $545,000 for a single person) in today’s money.
The beauty of compounding interest means that if you allocate an annual tax return of $2,000 towards your super portfolio each year for the next 25 years you’ll be $102,000 better off in retirement (assuming an interest rate of 5%).
4. A mortgage offset account
An offset account is a regular transactional account linked to your home loan. Its major benefit is that you only pay interest on the difference between the money in the account and your mortgage.
The idea is that – under the right circumstances – the money that you save from paying off the interest on your mortgage can outweigh the money you’d earn from a savings account. It could also help you become mortgage free sooner.
The best bit? Money in your offset account is still available for you to use.
5. Still want to treat yourself?
If you can’t resist buying a new computer or tablet, make sure it’s related to your work.
If you purchase a work-related item worth more than $300 you might be able to claim it as a deduction in next year’s tax return. Just be sure to double check you can claim it first.
And hey, if you remain unconvinced and still want to go on that overseas beach holiday, who are we to try and stop you? You’ve no doubt earned it!
Need a hand?
All those that get a refund look forward to getting a juicy one. But if you’re not sure what you should do with yours, lets chat.
We can help devise a strategy tailored to your individual circumstances to ensure you get the most out of this year’s tax refund. Simply call us on (03) 8609 9226 and we’ll schedule a time to chat.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
