Tax refund - Key to your savings fortune

Can’t decide on what to do with your tax refund this year? Jack Han reports on how to get the most mileage out of your refund.

It’s tax refund time, which means millions of Australians are pondering whether to spend their payment at the shops, or put it safely away into their savings accounts. As the decision looms, many Australians have gained a revealing perspective by looking into the future of their savings.

A Suncorp survey of more than 4,000 people recently discovered that 41 percent plan to save their tax refund. Another 41 per cent will be paying off credit card and mortgage debts, while 18 percent plan to spend it .

Suncorp’s General Manager of Banking Terry Wasmund says that while the high proportion of savers is impressive, it’s no sin for others to be spending their tax refund.

“It’s tempting when we receive a large payment such as our tax refund to hit the shops and spend our money on new clothes or gadgets,” he said.

So whether it’s spending, saving, or paying off debt, how can you make the most of your tax refund?

The Australian Tax Office estimates that the average tax return is $2,000 . If you’re paying off a mortgage, a $2,000 lump sum repayment on a $300,000 loan at 5 percent p.a. over 30 years can save you $6850 in the long run (without including any costs that may be incurred for lump sum payments). If you injected the average tax refund into your home loan every year, you would save six years and $60,000 in interest.

Now consider saving your tax refund in the highest interest savings account, which is currently the UBank USaver, at 5.11 per cent. Compared with adding your refund to your home loan, your $2,000 tax refund can take you to $9,234 over the same term, and $142,000 if you chose to put it into savings every year .

While the cheapest mortgage rates are lower than the highest savings account rates, collecting interest from savings will be a more attractive option. However, when interest rates bounce back up, there’s no doubt that Australians will be better off making extra repayments on their home loan, lest they get hit by rising repayments.

In the March quarter, household savings were only 1.8 percent of our disposable income according to a 2008 Treasury report . If you’re saving towards a goal, the first thing you need to do is set your own savings ratio.

For example, on an average weekly income of $900 , if Sarah was saving for a $5,000 holiday in two years time, she would need to put away $50 a week, which is 5.5 percent of her income. If she couldn’t wait, and wanted to go in just one year, she would have to double her savings ratio to 11 percent ($100 a week).

The bigger the goal, the bigger the ratio, so if Meg planned to save $40,000 for a deposit on her first home in three years time, her savings ratio will be 28 percent, and she will need to put aside $250 per week. If she combined her savings with her tax refund, Meg could reach her goal in just 2.5 years.

By mapping out its earning potential, we can see the true value of our tax refund. You don’t need to be a fortune teller to see how your savings will grow. All you need to do is compare savings accounts online to make sure your refund gives you the returns that you’ve worked hard to deserve.

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