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.
Doesn’t tax time come around fast?
It doesn’t feel that long ago since last financial year’s tax return was done and dusted, and now the next deadline (October 31 if you lodge your own tax return) is in sight again.
But hey, let’s stay upbeat about it!
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.
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.
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.
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.
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%).
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!
We all look forward to getting a juicy tax refund. But if you’re not sure what you should do with yours, come in and have a 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.