So it’s that time of year again where you’ve done your tax, or had an accountant do it for you, and you’re waiting impatiently for your tax return to roll in (yay!). Most people will get a refund from the tax office, which means it’s pretty likely that some money is coming your way sometime soon. This amount could range from a couple of hundred dollars, up to a couple of thousand, depending on your income, the consistency of your working hours and the deductions you are entitled to claim back.
Before that magical day arrives and the lump sum hits your bank account, have a think about what is the best way to use that money. My rule of thumb is to treat myself by splurging 10% of my return, and putting the other 90% of it to good use for my future. This gives me a good balance between a little bit of fun now, and some money which will give me a lot of fun later!
Below are some grown-up ideas for where you should consider putting your tax return, in order of priority. I’ve explained in each why it is a good idea, but feel free to question me on this or make your own suggestions – I’d love to hear from you and your experiences!
1 – $1000 Emergency Buffer
If you don’t already have one, your first priority should be to have an emergency fund sitting in a high interest bank account to get you out of a sudden tough spot. This could be anything from a car breakdown, unexpected bills, a medical emergency etc. I call this my “sleep easy money” because it means I can sleep comfortably knowing that if an emergency comes up, I can call on this money immediately and not have to rely on beg / borrow / steal / credit cards. If you don’t have an emergency fund already, I’d make this your top priority.
2 – Pay Off High Interest Debt
This includes ‘bad debts’ like credit cards, personal loans and car loans. These generally have an interest rate between 10-20%, which is ridiculously high! By paying these off (and keeping them paid off), you’ll no longer be a slave to the big banks paying them interest every month.
Did you know: If you owe $18,000 on a car loan, you’re paying around $3,200 every year in interest alone! This is without paying anything off the actual loan balance itself, it’s just profit for the bank! I’d rather have that 3 grand in my own pocket thanks very much 🙂
3 – Pay Off Mortgage
If you’re a real grown up with a mortgage, and you’ve taken care of the first two priorities, I’d pay your tax return off your mortgage. Every dollar extra you pay off it is a dollar closer to owning your own home and not having that monthly payment anymore. It also saves you paying interest on that dollar for the next 30 years.
4 – Use It To Seed Your Side-Hustle
If you’ve got a hobby, interest or potential side business you want to start up, why not use your tax return money as your own seed capital. Many side businesses can be started for very little initial outlay, so this is the perfect way to grow your passion project or an extra income stream for yourself. For a web-based business, a web based domain name will cost you around $150 per year, and the rest you can largely do yourself (with a little help from Google and YouTube). You could also put some money towards online advertising, but do your research first to make sure you’re getting bang for your buck!
5 – Invest In Super/ Retirement Fund
OK, super boring, but super important. It is a really, REALLY, good idea to put extra money into your superannuation (for Aussies) or retirement fund as early as you can. Do you realise that $1 invested at the age of 20 will be worth about $31 when you retire at 65! Awesome returns, so something you should consider seriously. Imagine putting $100 into super at age 20, and it’s worth $3,100 when you retire – that $100 just bought you an awesome holiday overseas!
6 – Invest In Stock Portfolio
Similar to retirement funding, but without locking up your money for quite so long, is to start a share portfolio. The trick is to not stress too much about what to invest in, just do a little research (I’d recommend an index fund) and start socking your money away. Only do this if you’ve got 8+ years until you’re likely to need to money, because the stock market can tank at any time, but if you’ve got 8+ years, there’s a strong likelihood that you’ll get very good returns.
7 – You Don’t Need My Help
If you’ve done all of the above – you don’t need my help! You’re on top of things and could probably give me some advice, so please feel free to in the comments!
So, I bet you’re wondering what am I going to do with my own tax return this year?
Well, I’m practicing what I preach! I’ve already received my refund of around $2,000 – so I used 10% for something I wanted (an amazing new chair for my little home office – this yellow baby, above) and I put the remaining $1,800 across ideas 3, 4 and 5. I paid some off my mortgage, used some to grow my business and put some towards my retirement 🙂