So it’s that time of the year. When you need to dig through the shoe box, scroll through your smartphone camera roll, or scour the hard drive for your receipts so you can get your tax sorted. But once you’ve done your return, what do you do with that pile of sweet, sweet cash?
The easy option is to give into temptation and blow the money to give you a short-term pleasure hit. And sometimes that has its place. But, if you’re smart about what you do with your tax refund you can put that cash to work to create more money for you in the future.
Check out my top tips on how to get the most out of your tax return.
Ditch Your Personal Debt
If you’re running personal debt like credit cards or personal loans at anywhere near the average interest rate of 15%, it’s like trying to work with a leaky bucket. You take two steps forward then one back. Ditching this debt will kill the dead interest payments and mean you hold onto more of your income to use for getting ahead, or maybe just save for your next epic travel adventure faster.
Build Your Emergency Fund
There are a bunch of scary stats out there that show most Aussies don’t have much in the way of emergency funds to fall back on in the event of the unexpected. Your tax refund can be a good way to jump-start your emergency savings so you have money set aside if something goes wrong.
Pay Into Your Mortgage Or Offset Account
Because your mortgage interest rate will almost always be higher than what you can get on a savings account, paying down your mortgage can be a solid option to accelerate how quickly you get ahead. So, if you’ve nailed your personal debt and have a bit of a cash buffer in place, putting your tax refund into your mortgage or offset account can be a good option to cut your interest costs. This can mean you either pay down your loan faster, or if you pay directly into your loan this can reduce your monthly mortgage payments and ‘free up’ some of your income into the future.
Start An Investment Plan
Investing is a super effective way to grow your assets and build a second income, which is important if you don’t want to work forever. Saving just a small amount regularly over time, with the power of compound interest, can grow into a massive number in the future. But for most people, if you don’t have experience with investing it can be scary to get started. If you want to invest the smart way, and do it with confidence, you need to educate yourself. Take the time to understand investing, see how it could work for you, and manage your risk so you get the right results when you invest.
Build Your Super
Putting money into super can give you a tax deduction now and get your money into super where tax rates are much lower than most people’s personal tax rates. This means making contributions to your super can help you grow your assets faster, and mean you get a bigger tax refund next year too. The only downside of super is that the money is locked up until you’re ready to retire (age 60 under the current rules), so you need to balance the tax benefits with the inability to access your money. If you’re thinking about contributing to super, map out your broader money strategy and make sure you’re not going to need the cash before you lock it away.
Your tax refund can give you a short-term pleasure hit by funding your next holiday, an epic night out or two, or a new tech toy. Or, if you resist the temptation of short term fun, you can use the money to help you create much more money in the future.
The choice is yours. Choose wisely.
Image Credit: Brandon Jackson
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional (perhaps one with a glorious beard).