Australians are now enjoying the tax benefits passed by the government as part of an effort to boost the economy. These tax cuts have allowed them to pocket extra funds that they can freely use. However, it is crucial to know how to use these tax refunds wisely, a market watcher said.
The amount of the tax refund should not prevent Australians from allocating them efficiently, personal finance educator Owen Raszkiewicz said in a report in ABC Life.
Paying off credit cards and personal debts
Raszkiewicz said Australians should prioritize paying off any credit-card debts or personal loans with the extra funds they get. Doing so would allow them to dodge high loan costs, given that such debts charge higher interest rates.
"If your credit cards or personal loans are charging 10% or 20% in interest, they're burning a big hole in your pocket. If your investments are earning just 5% or 10%, you would be better off paying that down before investing," he said.
Funding a mortgage offset account
The next best thing to do with tax refunds is to set up an emergency fund. Raszkiewicz said it is advisable to put the money in an account without immediate access.
For instance, those with mortgages could use their tax refunds to boost their offset accounts.
"If you've got an offset or redraw facility on your mortgage, that can go towards your emergency funding. You can still access it, and it's saving you that 3% or 4% in mortgage interest each year," independent financial adviser Debbi Lin told ABC Life.
Australians can also use their tax refunds to boost their superannuation, said market watcher Patrick Wright in an advice piece in ABC Life.
"It's called the super co-contribution. If you earn less than $38,564 and make a $1,000 after-tax contribution to your super account before June 30 next year, the government will chip in an extra $500 to your super," he said.
However, make sure to check first if you are eligible to make super co-contributions. The Australian Tax Office has a co-contribution calculator than can help you determine if you can avail of the service.
It’s important to note that using a super account would not allow you to access your funds like you could with a bank account. The only way you can access the funds before retirement is by buying a home under the First Home Super Saver Scheme.
Investing in the shares market
Wright said the shares market is also a viable vehicle in which to invest over the long-term. However, the strategy actually depends on how large your tax refund is.
If the budget is limited to $100, you could explore micro-investing. Tax refunds of more than $500 could be used to buy direct shares through a broker.