Toil-to-treasure: make your tax refund work for you
It’s that time of year again, when Australians participate in the curious ritual of surrounding themselves with mountains of receipts and burning the midnight oil, as they attempt to extricate the maximum number of claims to record on their annual tax returns. After much blood, sweat and fears, the magic dollar amount appears in the Expected Refund column.
Before you get too excited over the amount you should receive from the Taxman, it’s important to remember the money is not a gift from the government but the return of money you’ve worked hard for. It’s your money and you should now make it work for you. There’s no better time to reassess your situation and make a master plan to gain control over your finances.
The urge to splurge on a plasma, a holiday or a spot of retail therapy is powerful but is this merely instant gratification or a component of a pre-determined plan? Reminding yourself of good debt versus bad debt at this stage can be useful. Good debt is where the underlying value of the asset is appreciating. An example of this is a home loan, or margin loan used to buy shares. Over time, even though you’re paying interest, you should at least get your money back or, hopefully, make a profit when you sell.
Bad debt, on the other hand, is using a credit card, store card or loan to buy something that will quickly depreciate in value. This could be a car, a flatscreen TV, or even groceries. All you are left with is the debt plus interest owed. Minimising or eliminating bad debt is a giant step towards financial control.
Kickstart your new financial plan with these tips:
1. If you’re a student with a HECS debt, look at ways to take advantage of receiving a discount on the debt by paying a lump sum. For instance, making a voluntary payment of $500 or more means a bonus 10%, or $550 off the debt.
2. Park your tax cheque in a high interest earning savings account, such as an online account that pays around 8%. Keep topping it up regularly and watch it grow towards your goal. This could be a new car, an overseas holiday or the proverbial rainy day.
3. Think debit not credit. Aim to pay off a credit card and stay out of debt.
4. Don’t fall for a mobile phone plan with a free phone. You are probably better off buying a phone outright and using a prepaid card.
5. Bulk up your savings for a deposit on a home of your own with a lump sum payment, courtesy of the ATO.
6. For the homeowner, there’s nothing better than paying a lump sum into your mortgage. This not only reduces the debt but you can always redraw the money at a later date for an emergency.
7. Why not put your tax cheque towards your children’s education? Start an education fund and commit each year to this savings account. Teach your children good money habits by opening a savings account for them. Shop online at RateCity.com savings accounts for these.
Aside from this year’s tax return, you may also be eligible for a little extra tax relief, courtesy of the Rudd government. While this weekly amount may be small, it will soon add up in a special purpose savings account, such as a Christmas or children’s education account. The important thing is not to waste it. Whether it contributes to your savings or adds to your repayments, it’s another step forward to financial freedom.
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