Tax refund, Key to your savings fortune

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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Learn more about savings accounts

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 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.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

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.

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.

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.

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.

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

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.

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 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.

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 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.

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)