Working out what to do with your tax refund is just as, if not more important than maximising the amount you get back. As the end of the tax year rolls around, many people are thinking about getting the most out of their tax return. You’ve probably been focused on questions such as will I get a tax refund or how much will my tax refund be. Or perhaps you’ve been looking at what deductions you can claim on your tax return or how to get the more money back on your tax return?
Instead, we are going to look at what to do with your tax return once it comes through. Obviously it is easy enough to spend it all in one go, but what are some smart things you can do with your tax refund that will really make an impact on your finances for the year to come?
Five smart things to do with your tax refund
Now these might not be the most exciting ways to spend your tax refund, but they will make a positive difference to your long term finances. Look at it as short term pain for long term gain! Being smart with money windfalls is a really important part of being wise with money and making the most of what you have.
Use your tax refund to pay off your credit card
Nope. It’s not super sexy and it certainly isn’t exciting, but using your tax return to pay off debt, particularly high interest debt such as credit cards, is probably one of the best things you can do with your tax refund.
It’s not likely that a few hundred (or even a few thousand) dollars will fall into your lap too often, so making the most of your tax refund by paying off some of all of your credit card debt is a smart move. Generally the best approach is to pay of the debt with the highest interest rate first. If your refund won’t cover the whole debt, pay off what you can and then lower the credit limit. If it will cover the whole amount then pay it off and cancel the card! Don’t let it tempt you to fall back into debt.
Use your tax refund to pay down your mortgage
If you don’t have any credit card or other high interest debt, then paying down your mortgage is likely to be the next best option for making the most of your tax refund. If you’ve got an offset account then this is a good place to put your tax refund. It will reduce the interest you pay on your home loan and help you pay it off faster. The benefit of an offset account is that the money is still available if you need it in an emergency (similar to a redraw facility) but don’t be tempted to take little bits and pieces out to pay for things you couldn’t otherwise afford.
Use your tax refund to replace essential appliances
Nothing sends a budget into disarray like your hot water system blowing up or your fridge dying. If you have appliances that are close to the end of their life, now is the time to consider which should be replaced and start looking around for great deals. Using your tax refund to replace an old fridge or an inefficient hot water system can also save you money on your power bills, and reduces the likelihood of overpaying on an appliance because you need to buy quickly in an emergency.
If you don’t need to buy anything right now, consider putting the money aside into a high interest account or your mortgage offset so it is there and ready when you need it.
Use your tax return to prepay bills
Using your tax return to prepay some of your bills can be especially helpful if you have an inconsistent income. Consider paying ahead on your power bills or putting some extra onto your phone and internet account. If you have kids, you could put aside a terms worth of sports fees or music tuition. Continue to set aside money for these expenses as part of your weekly or fortnightly budget so that you stay ahead and the money you’ve prepaid acts as a buffer.
Use your tax refund to save for Christmas
Christmas?! Yep, I just spoke the word Christmas… in July! Don’t freak out but it is actually only 23 weeks until Christmas. How much do you normally spend on Christmas? If you are looking at spending $1500 (which is pretty conservative by Australian standards), you’ll need to start setting aside over $65 a week from now until Christmas. If you don’t start for another month then that amount will jump to nearly $85! Using at least part of your tax refund to kick-start your Christmas savings isn’t looking so silly now it is 😉