Four tips on how to use your tax refund

You might be lucky enough to be receiving a welcome lump of cash soon after filing your tax return – but should you be saving or splurging that refund?

For many Australians, a tax refund is a significant financial boost that they look forward to each year.

According to ME Bank, in 2014-15 the Australian Taxation Office (ATO) issued an average tax refund of $2,564, and out of 13.2 million taxpayers, 10.3 million received a refund.

When handed a sum of money like that, it can be a tough decision to choose the best use for it, especially with the temptations of end of financial year sales at most shops.

But in an increasing sign of austerity, an ME Tax Back Survey has found that only 13% of Australians are intending to squander their tax refund this year on goods and services such as clothes, entertainment, or a holiday.

Meanwhile, 64% of respondents are expecting to save that tax refund and 42% plan to pay off debts such as their home loan.

ME Head of Deposits and Transactional Banking, Nic Emery, says these findings suggest many Australians are using their tax refund to get their financial house in order and improve their financial security.

“And rightly so; a tax refund is money you haven’t factored into your household budget and can make a big difference to your long-term wealth when used wisely,” said Mr Emery.

If you’re thinking of putting that extra bit of money to good use this year, Mr Emery has four tips on how to use your tax refund, smartly.

Smart ways to use your tax refund

1. Do yourself a favour and reduce debt stress

No one likes to send their paycheck straight to bills, but it’s a reality that many of us face.

Sometimes it’s hard to keep up with the mounting debt.

So ME’s Nic Emery recommends using that extra bit of cash from your tax refund to ease debt stress.

“Paying down debt is a great strategy as it reduces an ongoing cost, freeing up your monthly budget,” said Mr Emery.

He says it’s a good idea to start with higher rate bad debt first – for instance, your credit cards could be a good place to start.

If you have more than one credit card debt to repay, you might consider consolidating them onto one credit card with a balance transfer deal so you can repay the lot with a few months of interest-free breathing space.

But if you have something else that could do with a down-payment, it won’t hurt either.

To see how making additional repayments on your home loan could save you money in the future, check out this article or try Canstar’s extra repayments calculator.

“While a home loan has one of the lowest rates of any type of debt, it’s also a long-term affair and any lump sum you tip in today can knock years off the term and save you a bundle in interest along the way,” said Mr Emery.

See our comparison table below sorted by our star rating (Highest – Lowest), which features a snapshot of the current providers who are offering variable first home buyer loans with links direct to the providers’ website. Please note that this table is formulated based on a loan amount of $600,000 taken out in NSW, repaying both principal and interest.

2. Think long-term and add to your super

Mr Emery says putting your tax refund into your super is also a smart move because it will help grow your retirement savings.

According to ME research, about 31% of households worry how they will maintain their standard of living in retirement.

Although your employer is required by law to pay 9.5% of your earnings to your designated super fund, you can also contribute more to your super.

“Given the power of compounding returns, the more you contribute now to super, the more you’ll have for retirement,” said Mr Emery.

If you are thinking of putting your tax refund into your super account, it’s also worth considering how the government’s new tax changes to superannuation may affect you.

In the market for a super fund? Check out our comparison table below, featuring a snapshot of the current market offerings with direct links to the policy provider. This table has been sorted by life and income protection (highest to lowest). Please note that this comparison table is based on the policy holder falling between18 and 29 years of age, with a super balance of up to $50,000.

3. Future-proof yourself and save for the unexpected

You never know what life’s going to throw at you – and for that reason, Mr Emery suggests you bank that tax refund into an emergency fund.

“Ideally, you’d have reserves to cover at least 6 months of expenses,” said Mr Emery.

“But even having a small stash of cash can help you weather life’s unexpected events or outlays.”

Whether it’s an unexpected hospital bill not covered by health insurance, a washing machine breakdown, or an expensive car issue, it always helps to have a few extra dollars set aside to cover you.

It’s a good idea to keep your emergency fund in a separate savings account to your normal spending account, just to avoid dipping into your savings all the time.

4. Lock up those savings

Emery’s final tip for how to use your tax refund this year is to save, save, save it!

“If you just leave it in a transaction account, it’s too easy to dip in, even unintentionally, for non-essential expenses,” he said.

Emery says it’s a good idea to consider locking away your tax refund into a separate savings account or even a term deposit.

That way, you’re earning interest and can make a solid move towards reaching your savings goals.

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