Big ideas for a small refund

THERE’S a lot to love about tax refunds. Getting money back from the government is always something to celebrate, and it’s not often we receive a lump sum windfall.

So it’s definitely worth thinking about how to get the most bang for your tax refund buck. Surprisingly, most people don’t plan to head to the shops with their tax cheque.

A survey by Finder shows one in two of us will save our tax refund. The remainder will use the money to pay regular bills (17pc), take a vacation (11pc) or pay more off their home loan (7pc). Only one in 20 people will invest their tax refund.

So what’s the best way to use this windfall?

A lot hinges on your personal situation. But if you have an outstanding credit card debt, you could save around 15 per cent in interest costs by using your refund to clear the balance. That’s a far bigger gain than you’ll earn by putting the money in a savings account — where, coincidentally, the returns are also fully taxable.

It’s not a bad idea to tip a refund into your home loan. Mortgage rates may only be about 4 per cent, but the compound interest benefits of paying your loan off early are high.

There are other ways to use the tax man’s refund. Like super for instance. Using the money to make a contribution to super may mean you can’t access the cash for quite some time. But last financial year, the median balanced super fund option delivered gains of around 9 per cent. That’s more than double the returns on most savings accounts. And if you’re a low to middle income earner, adding to your super could see you entitled to a government cocontribution worth up to $500.

Another option to turbocharge your refund is using the cash to kickstart an investment portfolio. Investing directly in shares is easy, or for an even more low maintenance option, managed funds can spread your money across a variety of assets. Coupled with a regular saving plan, even a modest tax refund can grow into something substantial.

There is another way to use your tax refund you may not have considered: take action with emerging issues that could grow into a far bigger expense later on. I’m talking about things like getting the car serviced before a minor hiccup becomes a major repair. You won’t make money, but it could certainly help you save money. And sometimes that’s just as financially rewarding. — Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.