It's tax time again
Have you decided how to spend your tax refund this year? While our minds may turn to that new pair of shoes we’ve had our eye on or the latest DVD box set, ASIC is encouraging people to consider using their refund for both a bit of fun and to improve their financial position.
If you receive a tax refund, you might decide to use a small part of your refund to splurge on something for yourself, but also consider letting your money work for you and use the bulk of it to put yourself in a better financial position. By doing this, you can really boost your financial position, especially if your weekly budget is tight for other reasons, such as higher fuel costs.
Here are 3 tips to help you decide what's best for you:
Tip 1: Reduce your credit card debt
One of the best ways to make your money work for you is to pay off some or all of your credit card debt. And if you are able to pay off your credit card in full, consider using a card that debits your savings account instead, so you spend your own money and you’re not paying to use someone else’s.
Credit cards generally charge high interest. For example, making only the minimum payments on $1,000 can take over 13 years to pay off. And it would cost you about $1,200 in interest alone. A one-off payment of $500 from your tax refund would cut six years off and save around $800 in interest.
[Assumes 18.5% interest, minimum payments of 2.5% or $10 on a $1,000 credit card balance and that you stop using the card. Calculated using FIDO's Credit card calculator.]
See how much you can save by making more than just the minimum payments by using the Credit card calculator
Tip 2: Try to contribute more to super
Another good option is to put your tax refund straight into your super fund. Contributing more than the usual nine per cent (the Superannuation Guarantee) can really boost your savings. The key to growing your super is to start early so you can harness the power of compound interest. Money invested today has longer to earn interest compared to money invested just before you retire.
For example, if you’re 30 and decide to put $300 from your tax refund straight into your super fund each year, you will grow your super savings by around $18,000 (in today’s dollars) by the time you are 60.2
[Assumes 8.5% returns and no fees. Calculated using FIDO's Super calculator.]
You may also be eligible for a Government co-contribution. Under this scheme the Government will contribute up to $1,500 into your super fund per year, depending on your own after-tax contributions and your income. For details about the Government co-contribution visit the Tax Office’s website at www.ato.gov.au or call 13 10 20. And try out FIDO’s Super calculator.
Tip 3: Get ready for Christmas
It may be months away, but Christmas and the summer holidays can be an expensive time for many families. Here are 3 ways you can use your tax refund to help out come Christmas time. And if you’re not getting a tax refund, these are still helpful tips.
Start a high-interest savings account. Kick-start your Christmas saving by putting your tax refund into a special account and watch your money grow. You’ll feel a real sense of satisfaction.
Shop and hold. Use the money from your tax refund to buy gifts now. You may be able to take advantage of sales or discounts that may not exist leading up to Christmas.
Use lay-by. If you have a small tax refund, use it to make a purchase by lay-by so that you’ll have your gift paid off before Christmas, rather than having a new year’s hangover in the form of a large credit card debt.
Be careful about borrowing to reduce tax
Many tax schemes encourage you to borrow money to buy investments (real estate, shares or units in a managed investment scheme) so you can claim the interest on the loan as a tax deduction.
Borrowing money certainly lets you buy an investment now, instead of saving up to buy it later. If the investment increases in value, buying it now could make good sense.
But borrowing does not save you money. At the very least, what you save in tax goes to pay your bank or lender instead. You'll have to pay interest on your debts whether you have an income or not, while you only have to pay tax if you have an assessable income. Finally, getting into debt is easier than getting out of it.
More about borrowing to reduce tax
Tax schemes
Australia has a long history of complicated tax schemes, often involving agriculture such as ostriches, olives, tea-trees and pine plantations. Always check the promoter holds a financial services licence and if they don't steer clear of them.
Read the product disclosure statement closely. If you understand these industries and can pick the good schemes from the bad, then these investments may suit you. But if you really know nothing more than you read in the advertisements, it may be safer to avoid them.
How tax schemes really work
Investing in films for tax relief
Managing your paper work at tax time
FIDO Website: Printed 11/20/2008
