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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Learn more about savings accounts

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.