Work and Wealth
5 ways to make the most of your Tax Refund
Are you one of the many taxpayers who have been motivated to lodge your tax return early for a refund? Or maybe the prospect of submitting your tax return is a bit like a household chore and better left for another day. Either way, if you’re expecting to receive a refund this year, then you need a plan for what you’ll do with it. Seeing a thousand or more hit your bank account can be exciting, the idea of having some free money is enticing especially if you wanted the latest iPhone, a new car, a holiday or just a shopping spree. As fun as they may be, none of these are on the list of five ways to use your tax refund to build your wealth.
1. Pay off debt
A tax refund is the perfect way to pay off some debt and gain back the control of your finances. The Australian Bureau of Statistics says that over 70% of households have some level of debt, so for the majority of Australians using their tax refund to reduce this debt should be their number one use!
If you’ve got credit card debt or a mortgage then pay as much as you possibly can off the balance, start with the debt that has the highest interest rate to ensure you get the best impact.
2. Top up your savings or create an emergency fund
If you’ve got a refund and not quite sure what to do with it then top up your savings or create an emergency fund for when you get those unexpected dentist or car repair bills. Finding a savings account with a competitive interest rate such as Ubank, ING Direct, etc. are great options for emergency funds. Be aware you may need to make monthly contributions to receive the bonus interest rate which is a great way to ensure you continue to build your savings. It can be difficult to get a good interest rate, if you’re unlikely to need the cash in the near future then a term deposit could be a better option.
3. Invest in shares
If you want to build a share portfolio then a tax refund is a great way to get started. The ASX offers you thousands of companies to invest in ranging from well-known blue chips all the way through to speculative miners. The minimum purchase on the ASX is $500 so using your tax refund could limit your investment choices. If you do decide to invest in shares, look for low brokerage accounts such as e*Trade and CommSec. A good alternative to investing in individual shares are ETF’s (Exchange Traded Funds), they are traded on the stock exchange and can be traded like normal shares through brokers (including low cost brokers) but offer a range of diversity such as real estate trusts, top ASX 20, 100 and 200 companies, commodities, etc. The benefit of ETF’s are the low costs compared to managed funds, the diversity of the investment, access to dividends and low costs to invest.
4. Top up your superannuation
A personal contribution to your own super fund or your spouse’s fund is a way to increase your superannuation and overall wealth, especially if you’re close to retirement age. These after tax contributions are in addition to any compulsory super contributions your employer makes or any salary sacrifice arrangements you may have.
Be aware that caps apply to contributions made to your super, which caps apply depends on your age and contributions before and after tax, so it is always best to seek professional advice before making any additional contributions.
5. Add value to your home
Renovating or doing repairs and maintenance can make your property more of a home while also adding value. Doing renovations to the right areas of your property, such as kitchens and bathrooms or a fresh coat of paint inside and out can increase the property value. It’s best to consider what areas will likely produce an increase in value and ensuring that you don’t over capitalise when renovating are important factors.
That’s five suggestions on how to make the most of your tax refund to boost your wealth. While you’re waiting for it to come through, get the plan ready or if you’re dragging your feet in lodging, use the prospect of a refund as motivation to cross this ‘chore’ off your list!