What to do with your tax refund
Your tax refund is a tantalising sum that appears in your account, to which no other part of your household budget has any claim. The average tax refund in Australia is around $2,500, enough money to treat yourself to a big reward, but not enough to do anything constructive with, right? Wrong.
It’s easy to think that a tax refund is money that’s already been spent, or that you never had, like a lottery win. But just because you said goodbye to that cash when it was taken out of your pay packet, doesn’t mean it has to stay gone forever.
A tax refund is your money that you earned. It is not a gift from the government, or even a windfall. Now that it has come back into your life, the trick is not to let it slip away again by ramping up your discretionary spending until it’s gone.
It is useful to think of a tax refund as money you have saved. It was deducted from your salary initially, but now the checks and balances have been accounted for, the remainder is returned to you.
It is too easy to see the refund as a bonus that justifies a shopping spree. Anecdotally, people who receive a windfall, whether it be a pay rise, lottery win, inheritance, pay-out, or some other source of unexpected income, spend far more than what they received. This means that, over time, they are in a worse position financially than they were when the money came to them.
Allowing this to happen with your tax refund is akin to taking money out of your savings account, and blowing it. Twice. Instead, plan to allocate the money to something that will improve your financial position.
If you have a credit card debt or other pressing repayments due, particularly those with a high interest rate, pay these down first. In all likelihood, the interest they will cost you is greater than any benefit you will earn by investing or saving the money. Next, you might consider paying a lump sum off your home loan, as this will have a multiplying effect to save you money in interest, and time off the term of your loan.
If your loan is flexible, you could redraw the money if you need it later for an emergency, or you could put it into your mortgage offset to minimise the interest you will pay. There is wisdom in creating an emergency fund to cover you in the event of a major and unplanned expense coming at you, but if you add it to your mortgage offset instead, it will be working harder for you and still readily available if you need it.
If you are still saving for a deposit, happy days. You are that much closer to your dream home.
Image credit: Got Credit