It is estimated that more than 70 per cent of Australians receive a tax return each year, and the average return has historically been in excess of $2,000, which is a decent chunk of money! So what will you do with yours?
If you are one of the lucky ones to receive a tax return this year, remember that it is part of your hard-earned money and should be treated the same as the rest of your salary or income and allocated to something useful. Don’t treat it as a windfall or a bonus and blow it on something unnecessary or extravagant (as tempting as it might be). Be smart this year and use your tax return to build your own financial security. Here are a few tips to help you use it wisely:
1. Pay off high-interest debt
One of the smartest things you can do is use your tax refund to pay off high-interest debt (such as credit cards) as soon as possible. Often you can be paying interest as high as 20 per cent on credit cards and each month you are simply throwing away good money on interest bills. Wipe your debt clean and start getting ahead. Don’t add more debt to your credit cards by using your tax return to go on an overseas holiday!
2. Invest it
If you are getting a sizeable return this year, you should seriously consider using it towards a deposit for your first (or next) investment property. You might be surprised to learn how little you need to get started, as there are plenty of attractive investments available for a very affordable price. The best thing you can do is speak to an experienced finance broker who can tell you what you need. Even if it’s not enough to buy a property now, it is certainly a good lump sum to add towards your savings. Every little bit helps, so don’t blow it!
3. Pay off your home loan
A major goal you should always try and work towards if you want to achieve financial security in life is paying off the mortgage on your own property (or the family home) as soon as possible. The sooner you pay it off, the more money you will save in interest. Alternatively, if your accountant or financial adviser recommends the strategy, you might want to consider paying the amount off the finance for your investment property. This will effectively help you to ‘get ahead’ and will create a small financial buffer that you can rely on if your circumstances change, rents decrease, your property is vacant for a period of time, interest rates rise or you have unexpected bills you need to pay. It always helps to have a little in reserve!
4. Put it in your mortgage offset account
If you are hesitant to pay the value of your tax return directly off your mortgage, you can place it into your mortgage offset account instead, which effectively achieves the same outcome. The interest on your mortgage will still be calculated at the lower amount but the funds will be easily accessible if you need them.
5. Start an interest-bearing savings account
If you don’t have any debt or property finance, place the lump sum in an interest-bearing savings account and keep adding to it until you are ready to use it for something worthwhile – such as a deposit for your own home or an investment property. Keep adding to it each month or arrange a direct transfer of a manageable amount on a regular basis and you will be surprised at how quickly it will grow!
6. Add it to your super
Another key objective of achieving financial security is ensuring you have enough personal wealth to retire on, and this includes superannuation. Most Australians don’t have enough in superannuation – particularly women and the self-employed – so speak to your accountant or financial adviser about the potential benefits of using your tax return to make a lump-sum super contribution. You will thank yourself for it in the long run.
7. Make improvements to your investment property
Another option you might want to consider is using your tax return to make small improvements to your investment property to increase its value and appeal to potential tenants. This might include renovating the kitchen, buying a few new appliances, or arranging a fresh coat of paint or new floor coverings. But before you make a start, make sure you speak to your accountant or financial adviser about which improvements you can claim as tax deductions and which you can’t. This will help you to evaluate the best way to spend your money and how you can truly add value.