Monday, 24 July 2017
Posted by Tom Watson
The month of July means one thing for millions of Australians: constant checking of their bank accounts as they wait for the arrival of that much sought after tax refund.
According to the ATO, over 80% of Australians receive a tax return each year with an average refund of $2,112 - a seriously welcome windfall for many in the middle of the year.
While it may be tempting to splurge that refund on a shopping trip or a new laptop, it turns out that most Aussies are pretty responsible when it comes to using their tax returns.
According to a 2015 Moneysmart poll, the most popular ways for Aussies to use their tax refunds were paying their bills (29%), putting it into savings (21%) and paying off loans or credit card debt (13%).
So if you’re set to receive a tax refund of your own this year, what are the options that will give you the best return?
With the average Australian credit card debt weighing in at $4,730 according to treasurer Scott Morrison last month, there’s every reason for Aussies to tackle it with their tax return - especially when the average credit card interest rate currently in the Mozo database is sitting at 17.29%. But just how much would it really save you?
Scenario: The Mozo credit card debt payments calculator reveals that it would take 2.5 years (and cost you a total of $1,095 in interest and fees) to pay off the average $4,730 credit card debt with an interest rate of 17.29% by making $200 monthly repayments.
By comparison, if you were to put that $2,112 tax return towards a $4,730 debt it would only take 1 year and 3 months to pay it off (and cost you just $302 in interest and fees) while making $200 monthly repayments.
Outcome: $793 saved.
Sometimes expenses just crop up in life without warning. Forking out a bundle to fix your car or to pay for some medical expenses is never ideal, but it’s even worse when you don’t have the money on hand cover them. That’s why having a rainy day (or emergency) fund is such an essential tool to have in case of unexpected expenses.
The best place to build an emergency fund is without a doubt in a high-interest savings account - which gives you the potential to earn interest on your money while still having the flexibility to withdraw it whenever you want. So what kind of emergency fund could a juicy $2,112 tax return help you build in three years?
Scenario: If you opted for a savings account with the average rate interest rate currently in the Mozo database (1.83%) you’d earn just $119 in interest over three years.
However, if you were to stash your cash in the highest-rate account currently on offer (ME’s 3.05% Online Savings Account) you’d earn $202 interest in that period… much better, but still not quite enough to create a safety net.
But what if you added $50 a month from your paycheck to that ME Bank account over three years? Well you’d end up with a balance of $4,197 - or enough to give you a decent buffer in case of emergencies.
Outcome: A $4,197 emergency fund created in 3 years.
Want to pay off your home loan earlier? If you have an offset account with your mortgage, putting your tax return straight into it could be a great idea to reduce your repayments.
Scenario: Depositing $2,112 into an offset account could save you $1,363 in interest over the life of your loan (based on a 25 year, $400,000 loan with the average 4.37% interest rate currently in the Mozo database).
Outcome: $1,363 saved over 25 years.
Got a longer term goal you’d like to achieve, perhaps buying a new car or making renovations to your house? While term deposit interest rates still aren’t quite what they were a few years ago, they’re still a better alternative to a savings account for longer term goals (as long as you're prepared to set they money away and not have access to it for a certain term).
Scenario: With the best five year term deposit currently in the Mozo database (RaboDirect’s 3.30% Term Deposit) you’ll be able to earn $348 in interest in 5 years, or a final balance of $2,460.
Even better, add your tax return to some of your existing savings for even greater returns. For example, the Mozo term deposits calculator reveals that a $10,000 original deposit into RaboDirect’s 3.30% Term Deposit would turn into $11,650 at the end of a five year term.
Outcome: $2,460 saved over five years.
Everyone needs a treat every now and then right? Well why not feel good while putting your tax return towards a summer vacation by purchasing your flights, accommodation and travel insurance now while prices are cheaper?
Better yet, the Australian dollar is currently the highest it’s been in two years against the US dollar (and many other currencies), so make sure you purchase travel money for your next overseas trip while you’re getting great value