The end of the financial year means that many Australians will find themselves a few thousand dollars richer thanks to a tax refund. According to the ATO, 77% of taxpayers received a tax return in the 2013/14 financial year with an average refund amount of $3,630.
A tax refund can provide a timely opportunity to get your finances in order, a chance to splurge on something you’ve wanted or discover something new. The trick is in finding the right balance between these competing urges so you don’t feel regret once the money is used-up.
First and foremost…
First the boring (but important) stuff. If you have a credit card or high-interest loan, it does make sense to pay that off first. The longer these types of loans pile up with interest, the harder it will be to afford any of the big things you want down the track. A tax refund can be a fast way to crush credit card debt and stop the bad-interest spiral as it can be tough to catch up with during the year, especially with average interest rates hovering around 17% per annum.
If you’re already free from credit card debt, setting up a ‘emergency’ fund can also be a smart strategy and will give you peace of mind that you won’t be out-of-pocket if something unexpected happened in your life (e.g. health issues or losing your job). For most people the rule of thumb is that 6 months worth of living expenses is a sensible ‘rainy day’ amount.
Now the fun stuff…
Once the house is in order there are plenty of approaches to spend a few thousand dollars or use it to start planning for something bigger. Here are a few to get you thinking:
1. Treat yourself to a holiday
Booking a holiday was one of the most common ways Australians spent with their tax refund last year1. Whether it’s a weekend away or a longer overseas trip, a holiday can give you a chance to relax, de-stress and discover new experiences. It pays to shop around and be flexible with your travel dates when booking your trip to get more out of your tax windfall. Compare airfares using online travel websites like Expedia or individual airlines’ websites before booking, and look outside of just hotels to see if you can find a better deal through Airbnb or Stayz.
2. Take up a new hobby
Finding a new hobby can be an excellent approach to relieve work-stress, give you a creative outlet and meet new people. If you don’t already have a hobby in mind, think about the things you already love and ways you could spend more time doing them. If you enjoy watching cooking shows like MKR or Masterchef, consider enrolling in a cooking class or joining a foodie tour. There are no shortage of outdoor, arts, spiritual or cause-related hobbies out there to discover and websites like Meetup or Milaana can help you connect with people who have similar interests.
3. Home improvement
Perhaps it’s time for that trip to your local hardware shop to tool-up and fix that corner of the home that’s been neglected? Or replace that old fridge or dishwasher on its deathbed. As well as TV shows like The Block and House Rules, home renovations pins on Pinterest can offer inspiration and bring out the interior decorator in anyone.
4. Donate to charity or support a crowdfunding cause
A tax refund can be a nice opportunity to give back to those less fortunate or in need of a leg-up. CHOICE gives tips on how to ensure your donation is making a difference to your chosen charity.
Websites like Kickstarter or Indiegogo enable you to support creative projects around the world and follow their progress. There’s a project to suit every interest, from a cat cafe in Sydney where you can sip a coffee and play with adorable rescue cats to a smart water bottle that syncs to your phone to track your water intake and glows to remind you to stay hydrated.
There are also some less-serious projects to support if you just want to have a laugh. Someone raised $55,492 to make a giant potato salad and another campaign is (perhaps forlornly) trying to save Greece from its debt crisis.
5. Save for something bigger
A few thousand dollars could be the perfect chance to start saving towards something in the future like a car, home, wedding, starting a family or retirement. As these types of goals might require a larger amount over a longer time-frame, you will also want to be disciplined with your spending going forward and consider investing some of that money which can give your savings a boost.
6. Invest in yourself
Why not use the money to improve your health and wellbeing by finding a personal trainer, joining a yoga or meditation class, or getting that dental procedure that you’ve been putting off. Afterall, without your health you won’t be able to make the most of a lifetime of tax returns to come.
Aim to avoid a tax return next year
Something to keep in mind is that a tax refund is not a free handout from the generous folk over at the tax office. A tax refund is actually money owed to you for paying too much in taxes during the year and means that you gave the government an interest-free loan as a result. This often happens when you work for more than one employer or change jobs during the year.
If you don’t enjoy giving the government your savings to hold onto each year, the ATO website has details on how to claim the tax-free threshold and apply for a withholding variation. This might enable you to access your money earlier in the year rather than waiting for your tax return.
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