Like many people, you are probably anticipating your tax refund every year. You may be thinking about splurging on the items you have in your online shopping cart. It can get very exciting to buy things you want and don’t need. But before you do, hit pause and do yourself a favour. Consider ways on how to be practical with the money you receive.
When we say “practical,” it, of course, depends on your circumstance. However, 2020 is the best time to be smart with how you spend your money, including your tax refund. Here are some tips on where to begin:
If you have “bad debts,” such as credit card balances and any high-interest loans, start with them. It is much easier to reach your financial goals when you have successfully eliminated your debts.
Bad debts are those that have high-interest rates. Most of the time, you use your credit card to buy clothing and electronics, which lose value over time.
Buy equipment related to your job for more deductions next financial year.
Electronics indeed depreciate in value as time passes. However, you can benefit from purchasing computers and tools if they are related to your work.
If they cost more than $300, the refund will be depreciated over the life of the item. But instead of buying them at the end of the year, make the purchase around July or August, which will cover more time and therefore give you a bigger deduction during tax time.
You can check our tax return checklists to see how you can get a refund on your equipment purchases based on your industry.
Build up your emergency savings.
Now that you have your debts paid off, you can boost your emergency funds if you still have some money left. Many experts agree that you should be able to set aside at least three to six months’ worth of savings for your living expenses.
Putting the money in a savings account will not multiply the amount. However, when you have some cash ready to use during unexpected situations, you can avoid expensive loans or credit card purchases.
Fix something in your house.
Unlike buying new smartphones or clothing, some purchases and improvements for your house can increase its value. It’s perhaps your most valuable asset. By now, you may already know that fixing things before they get worse is a smart move. For instance, if you have water damage in your house, it could become an even bigger problem if you do not take care of it right away.
Pay it forward.
Yes, sending money to a charitable organisation will not help you. However, other people could use the money. Do your research about charities with causes that you believe in and find out if they accept monetary donations. Some may only accept supplies, which you can buy to extend a helping hand.
Increase your superannuation funds.
You can use the tax refund to top up your super. Add a personal contribution through your own or your spouse’s super fund. This type of contribution is different from any compulsory contributions that your employer makes or through a salary sacrifice arrangement.
By increasing your contributions after taxes, you can boost your super savings big time. Note, however, that there are caps that apply to super contributions in a given tax year. Find out what your limits are, which can depend on your age and other factors, including after-tax contributions.
Save the money for your child or grandchild’s education.
Children or grandchildren grow really fast. The next thing you know, they are ready for college. Start a college or education fund for your child while it is still early. Let’s face it: education is not cheap. But the key to managing the cost is to plan ahead.
As a parent, you can use a three-pronged approach where:
- You work out how much you need
- Find out how much you can save on a regular basis
- Determine where you are going to put the money
Public schools are certainly more affordable, but they are not free. Remember that you will have to pay for uniforms, textbooks, and other items, which can take a huge chunk out of your budget if you are unprepared.
According to the Australian Scholarships Group (ASG), education for children born in 2017 can cost more than $76,000 from kindergarten to Year 12. But for Catholic systems, the average cost is even higher at around $230,000 while the private or independent system is the most expensive, averaging $556,472. With these numbers, it is important to save now rather than later. Although your tax refund will not be quite as hefty as you think, the amount you put into your child’s education can add up for the years to come.
Save for a house deposit.
If you plan to buy a house, you can use your tax refund for something meaningful, such as for your house deposit. Your goal should be to cover at least 20% of the total purchase price of the property. Some lenders may accept a five per cent deposit, but it also means that you have to pay for the lenders mortgage insurance (LMI).
Regardless, paying for the deposit alone involves cash that you may not be prepared to use. It is why setting aside some money for your house goal using your refund can boost your total deposit.
Last year, the ATO returned a total of $3.1 billion of excess taxes, averaging $2,381 for every Australian. Most people who receive the refunds would spend the majority of it. Understand that it is not extra money, but you’re actually getting back the amount that you overpaid the government. It makes sense to use it on essential things, rather than something you want in the short term. And the above list is surely a great place to start.
The best thing to do, however, is to ensure you get the complete refund you are entitled to. Contact TaxReturn.com.au or make an account to make lodging your tax return much easier.