The air is getting cooler and the sun is setting earlier. We all know what that means – it’s almost tax time!
If you’re one of the lucky Australians who’ll be getting a tax refund this year, you have a few places that you can deposit your dollars. But’s up to you and your financial needs to choose the most competitive option.
1. Put it in a high interest savings account
With virtually no-risk – putting your money into a high interest savings account can very easily help you grow your money over time.
According to RateCity research, there are savings accounts with rates as high as 3 per cent available. For most accounts, the maximum rate is only available if you follow the account conditions, such as making regular deposits into the account or not withdrawing funds. Otherwise your savings account can revert to a lower base rate.
This means that if you had a tax refund of, say, $1,500 and continued to make regular monthly deposits of $200 into a savings account accruing interest monthly, in 5 years you would have saved $14,672. This would make the total interest earned $1,172.
If you didn’t make regular deposits, however, you can still grow your savings. For example, if you took that same $1,500 tax refund and put it in a savings account with a base rate of 1.81 per cent accrued monthly, in 5 years you would have $1,642 – interest earned of $142.
As you can see, savings accounts can be an effective place to put your tax refund – if you continue to make regular deposits and earn the account’s max rate.
Interest earned per month on
Monthly deposit of $200, no withdraw
Monthly deposit, account balance must have increased
Monthly deposit, no withdraw
Min monthly deposit of $10, no withdraw
Bank of Queensland
Monthly deposit of $1k
Monthly deposit of $200
Use linked trans account weekly
Monthly deposit of $1K
Rates accurate as at 9/05/2019
2. Turn to a term deposit
Term deposits are similar to savings accounts, however unlike the former you are locking away your deposit and are unable to access those funds for a set period of time.
These are also a low risk option, as a fixed rate means you’ll know exactly how much interest your money will accumulate regardless of changes in the market.
For example, if you took that same $1,500 and put it in a high rate 5-year term deposit earning 3 per cent, at the end of the fixed term you will have $1,725.
If you’re the kind of person who is prone to dip into your savings or not make regular deposit, a term deposit can be a competitive option.
Rates accurate as at 9/05/2019
3. Pay off your credit card debt
When you receive a tax refund your first instinct can often be to spend, spend, spend. But what if you want to get on top of one or more debts?
Credit cards typically have higher interest rates than other debt sources, such as home loans or personal loans, which means that they can very easy get out of control if you’re not paying it down when you can.
If you’ve been slowly growing a credit card debt, it’s a good idea to try and get on top of it whenever you find yourself with a little more money thank you expected.
If you have a $5,000 credit card bill and are only making minimum repayments at 18 per cent, you can expect to pay $17,181 in total over 33 years. If you continue to only make minimum repayments but take $1,500 off your debt from your tax refund, you’ll shave 6 years off this time frame.
What if I have more than one source of debt?
If you’re wondering which of your debts to pay off first, the answer is simple – it’s generally best to choose whichever has the highest interest rate. It’s often a mistake to pay of the biggest debt first, such as your home loan, as something like a credit card will typically have a much higher interest rate and therefore a higher chance of causing your debt to grow out of your financial control.
4. That being said… put it into your mortgage
If your home loan allows for lump sum payments, you could also consider putting your tax refund into your mortgage.
Making additional one-off payments can help you to reduce the cost of your loan, shave off some of the interest owed and also help you to repay the loan back quicker.
If you have a $500,000 home loan that you’re paying off over 30 years at an interest rate of 4 per cent, making a one-off lump sum payment of $1,500 from your tax refund will amount to $2,579 saved in interest over the life of your loan.
This means your $1,500 lump sum payment has grown into additional saving of $1,079 off of your home loan.
Keep in mind that if your home loan has a fixed interest rate, you may not be able to make any lump sum or extra repayments without copping fees. Some other mortgages may also have a limit on the amount you can pay in additional repayments.
5. Donate it to charity
If you don’t measure your returns in monetary value, you could always donate your tax refund to the charity of your choice.
Charity comparison websites, such as ChangePath, are helpful resources to find not-for-profit that best meet your needs, as well as grade their transparency and financial sustainability.
And if you are so financially inclined – keep in mind that you can always claim tax on that charitable donation next year!