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How to spend your tax refund

How to spend your tax refund

In the next few months, roughly four in five taxpaying Australians will get a refund from the ATO[1]. Tax refunds are given to people who have paid too much tax during the year, either because the tax man overestimated how much income they would earn, or a proportion of their income was spent on items that are exempt from tax.

It’s a lovely, annual windfall that should not be wasted. Here are five ways you can use your refund, most of which have the added bonus of improving your financial health in 2016-17.

1. Reinvest in yourself

Do you have a small business? Perhaps you’re a freelancer, or a career-person keen to climb the ladder? Whatever the circumstances, a lump sum could be spent on investing in yourself and personal growth. That may mean purchasing a new computer, a new wardrobe or hiring a career coach or financial adviser. Money you invest in yourself may pay dividends in the future, via a higher salary or more paid work.

2. Pay off debt

It sounds boring, but while interest rates are so low, it’s a great time to use any excess cash to pay down the credit card or mortgage. When rates are low, your repayments go a lot further than they would if you were paying a higher rate of interest. The general rule if you have several buckets of debt is pay off the one collecting the highest amount of interest first to save yourself money over the longer term.  

There are more than a thousand home loans on the market that allow unlimited additional repayments, so if yours doesn’t, switching could be an option. Opening a mortgage offset account could help you save while reducing your interest at the same time.

3. Set up a savings scheme

The well-known rule of thumb in the personal finance world is save 10 per cent of your income over your life (though many say it should be 20 per cent). Even if you’re on a small to moderate income, when compound interest does its heavy lifting, you could end up with a sizable nest egg.

However, sometimes the 10 per cent rule gets pushed aside by more pressing financial pressures. A tax refund could be the way to make up the difference.

When interest rates are low, you’re not going to earn much for putting your savings in the bank, but there are a couple of high interest savings accounts that give you a little more. For instance, ME Bank’s online savings account is offering 3.35 per cent, which is well above the official RBA cash rate.

4. Take a holiday

While a holiday doesn’t have a direct financial benefit, a bit of time out could put you in a better headspace for the year ahead. A clear mind means more opportunities to get your finances into top shape. There are a number of winter deals around, so the timing could work out nicely.  

5. Give some to charity

Like a holiday, charitable donations rank highly on the feel-good factor scale. There are thousands of registered charities that could certainly use any extra cash you hadn’t been budgeting for.  Charitable donations above $2 are tax deductible, which means you’re saving on next year’s tax bill too. Win-win.

[1] Based on ATO annual reports, 2013-14, 2014-15. 

This article is general advice only and should not be treated as a substitute for tailored financial advice.

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