What will you do with your tax refund?
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Thousands of Australians receive tax refunds every year. Some refunds won’t even cover the cost of a pizza to celebrate, however many are quite substantial. If you’re one of the lucky ones, what will you do with your tax windfall?
If you go out and spend it, all you’re doing is giving part of it back to the government in the form of GST. Sure it’s nice to splurge once in a while but there are other places you can stash your cash and reap a longer term benefit. Consider these options:
a) Reduce your mortgage
By paying it straight into your mortgage, you immediately acquire more equity in your home and reduce the interest. Having more equity in your home also means that you can re-borrow that money again for investment, gearing, or to purchase other assets. So that’s an option that could keep on working for you.
b) Regular investment plan
Consider investing the lump sum and setting up a regular savings investment plan to build it up. This will help you meet future objectives such as a new home, education or new car.
While a certain amount of money in the bank is helpful for emergencies, now could be the time to consider a longer term plan with assets such as property or shares. You can invest in a managed fund with an initial deposit of $1,000 and make monthly contributions. While such investments are subject to fluctuations in value, you will see them grow over time. There are also likely to be tax benefits from franking credits.
c) Superannuation contributions
Your superannuation fund will surpass any other investment vehicle simply due to the law of compounding... and your contributions are taxed at only 15%[1]. Whilst superannuation funds remain the most tax-effective haven and thus the best way to grow your investments, the downside is that once your money is contributed it’s usually not accessible until you retire.
The moral of this story is to have a plan and then apply it. Work out where your tax refund will work best for you then talk your decisions through with your licensed financial planner.
