I reckon there’s a lot to love about tax time. In exchange for a few hours spent working out your income and tax deductions, most working Australians will receive a handy tax refund, and there are plenty of ways to put the money to good use.
A spot of retail therapy can be tempting but to give your tax refund some serious grunt, think about using the money to pay down debt.
A survey by comparison site RateCity found one in four people expecting a refund have exactly this strategy in mind, and it’s a very effective way to supersize the value of the tax man’s cheque.
As a guide, using a $2,000 refund to make a lump sum payment on a $300,000 home loan could cut around $6,843 from the overall interest expense. Make it an annual habit and you could slash as much as $77,000 off the total cost of the loan and be mortgage-free around six years sooner. (Assumes a loan term of 30 years and rate of 6.0%)
Or, try using your tax refund to pay down an outstanding credit card balance. Using a $2,000 refund to make a payment on a $3,000 card debt with a rate of 17%, could see you save up to around $5,000 in the interest charges that would apply if you only ever stuck to the minimum card repayments. Just be sure to avoid reloading the card with fresh purchases once you’ve paid off a big chunk of the balance.
Here’s another idea. Try using your tax refund to make a contribution to your super fund.
For a worker currently aged in their thirties adding a refund cheque of, say, $1,400 to their retirement savings each year could boost the final value of their nest egg by about 25%.
It’s not a bad result, and if you are a low to middle income earner, using your tax refund this way could make you eligible for the government’s super co-contribution. It’s a no-strings-attached contribution to your fund from the government, and it can be worth up to $500.
To see the difference your tax refund could make to your nest egg by the time you retire, take a look at the superannuation calculator on the government’s MoneySmart website (www.moneysmart.gov.au).
A tax refund can also provide a great incentive to kick start a savings plan. Use a $2,000 refund to open a savings account paying 3.5%, add $50 each week and after one year you could accumulate a balance of $4,716.
The beauty of a tax refund is that it’s something of a windfall – money we haven’t already factored into our budget. That makes it easy to put the cash to work improving our personal finances. As the examples I’ve shown here demonstrate, using even a modest tax refund wisely can make a substantial difference to your wealth over time.