By: Melissa Browne
More than six weeks have passed since the end of the financial year and by now many of you have completed your tax returns and are anxiously waiting for your tax refund. Which at an average of just more than $3000 a refund is quite a nice chunk of change.
In my experience, that tax refund is often already spent. It has been nominated for bills, credit cards, mortgages, holidays or, occasionally, new shoes. It is frequently met with a huge sigh of relief and a month later it is as though it never existed. Tax refunds are like the white bread of the financial world – not long after it disappears you’re hungry again.
But what if you tried a different strategy this year? After all, this is unexpected money. It’s not money you were potentially relying on, you didn’t have to do a whole lot for it and if you’re smart with it, you might find yourself being able to create a savings plan that involves more than just hope and the inheritance from a long-lost relative. Here are three options to consider when it comes to your tax refund, from paying down debt to leveraging your refund with good debt.
1. Sort out your credit card
If you struggle with paying down your credit card then this is your opportunity to sort yourself out. You might start with paying your refund onto it and then contacting your bank and reducing your credit limit. Yes, you can do that! You’ve probably received a credit limit increase offer in your lifetime but I’m sure you didn’t receive a credit limit decrease offer because that is not in the bank’s best interest. If you struggle to pay off your balance each month, make sure your refund is put to the best use by paying it onto your card and lowering your limit by the amount of the refund. Of course, there are more strategies you can adopt including swapping your balance to a zero interest card but again, take it out of your wallet and don’t use it, rather than finding yourself in trouble. It’s about making your refund work for you. The result? If your card limit was $15,000 and you pay your $3000 refund onto it each year and reduce the limit after you do, you’ll end up saving more than $2500 in interest by the time you get it to nil.
2. Invest in a managed fund
You don’t really have any debt but you don’t really have any savings either. Your tax refund may be your opportunity to start with a small windfall that you weren’t budgeting for and to continue to add to this with future refunds. Money in a bank account will earn you dismal interest rates and $3000 isn’t enough for a deposit on a house but you might consider investing in a managed fund. This gives you access to the sharemarket or even property via property funds without needing a large deposit or even understanding shares. The result? If you invested your $3000 every year for 10 years you would end up with almost $50,000 at conservative growth rates. All without a single coffee or cocktail forgone.
3. Leverage your refund
If you’re not scared of a little risk, you might consider leveraging your refund. Essentially this involves using the same strategy as investing in a managed fund but in year two and onwards, you would borrow an additional $3000 each year to add to your investment. The result? You could borrow more if your risk profile allowed but borrowing even $3000 each year combined with the $3000 you’re going to tip in from your refund would increase your investment worth to almost $90,000 in 10 years, which again makes the whole exercise attractive. If you’re in your early 20s it would be nice to know you would hit your early 30s with almost six figures saved without any effort except forgoing an annual tax refund which you might spend on shoes or holidays. I am all for shoes but exercising a bit of self-control at tax time gives you some really worthwhile options.
Sure, you might be in a situation where the refund hits your bank account and is immediately consumed by the many bills you’ve been juggling. However, for many of us the average tax refund represents a windfall that could really give us some financial options if we choose to be smart with it. Of course, you could save more by deciding to add to your investment or debt management plan during the year but the worst-case scenario, you have to admit, is a pretty nice one. Without a single latte forfeited.
Source: Sydney Morning Herald