Saving not splurging: One in three plan to stash a tax refund
According to a Finder survey, the average tax refund this year will be about $2,600, and one in three Australians, around 6.8 million people, plan to put the tax man’s cash into savings.
Add up the numbers, and this year’s tax season could see an extra $17.6 billion funneled into savings accounts. It’s quite a turnaround from previous years when tax refunds were often seen as a ticket to enjoy a quick spend.
Using a tax refund to beef up cash reserves can be a smart move in the midst of a pandemic. However, Australians overall have considerably boosted their savings over the last 18 months. Much of that money is sitting in savings accounts earning next-to-nothing in interest.
There are ways to ramp up the value of a tax refund. Here are a few ideas to kick-start an improvement in your finances – if you resist the urge to splurge.
1. Grow your super, get a helping hand from the government
Using a tax refund to make an after-tax contribution to super can see you tap into the government’s co-contribution scheme.
The size of the co-contribution you receive will hinge on your income and how much you contribute. If you earn less than $41,112, the government will chip in 50 cents for every dollar you add to super, up to a maximum co-contribution of $500. You could still be entitled to a partial co-contribution if you earn up to $56,112.
2. Add to your super, boost next year’s tax refund
If you’re not eligible for a co-contribution, think about using a tax refund to make a before-tax super contribution. You may be able to claim the contribution as a tax deduction in the current financial year, potentially supersizing next year’s refund. The extra cash going into your super will also make a welcome difference to your nest egg by the time you retire.
3. Kickstart an investment portfolio
If you’re happy to take on more risk, your tax refund can be used to kick-start an investment in shares or exchange traded funds. The Australian sharemarket has notched up total returns averaging 10.85% annually over the last five years. That’s a lot more than you can expect to earn on a savings account. However, you should be prepared to invest for the long term – at least 5-7 years, to iron out any short term market dips.
If all this sounds a bit too sensible, go ahead and treat yourself to a small luxury. But putting the bulk of your tax refund – money you’ve lived without all year – to good use is a great habit to get into.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.