Options for making the most of your tax refund are many and varied, but some are far more powerful than others. An annual tax refund of $2,000 adds up to around $80,000 over a 40‑year working life. Introduce compound interest over that period at 5% and it adds up to a final figure of somewhere around $240,000 according to the ASIC MoneySmart calculator.
These are average figures and don’t take into account the large number of variables throughout a person’s life, or fees and costs. But they do a good job of illustrating the power of the investment of what can, at tax return time, seem an insignificant or even trivial amount of extra cash injected annually into your bank account.
Productive uses for a tax return fall broadly into three areas:
1 Building future wealth
The above example of investment and compound interest is to do with building future wealth. The final figure is enormous and, indeed, life changing. In our averaged example, an initial deposit of $2000 followed by 39 years of $2000 annual deposits means $80,000 has been deposited over one’s working life. At the same time over $160,000 of interest has been added along the way. It’s a heady bonus for a small amount of disciplined investing.
2 Reducing interest payable on loans or money lost from other sources
In the second category – reducing interest payable on loans and reducing money lost from elsewhere – the obvious choice is to pay down loans with your tax return money. Concentrate particularly on high-interest loans such as credit card debt. But there are also other, more creative, options. If you invest in a gym membership, for instance, or a mountain bike, a pair of running shoes or a personal trainer etc – and use them well – chances are you’ll save yourself healthcare costs later in life.
Your lifestyle should also benefit. Fixing or renovating parts of your house can be a good investment in both lifestyle and property value and can help avoid hefty repair costs in the future.
3 Increasing future earning capacity
Other investments in one’s self, which satisfy the third area relating to increasing your future earning capacity, include investing in your own further education. As a result this should boost your employability.
Finally, think of others you’d also like to invest in, from charities to your own children. Injecting cash into an education fund for the kids is possibly the most satisfying investment you can make.
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This web page may contain general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.