It’s a good idea to have a plan in mind for money you get from a tax refund, otherwise it’ll be gone before you know what to do with it! You might already have your tax return earmarked for some good times (Laneway Festival anyone?!) – but before you go making it rain with your tax refund, think about the fact that this tax return is no gift from the government but rather your own money that should have been in your bank account from the beginning.
Big Tax Refund, Big Problem
If your refund is massive, it’s no reason to celebrate because it means you’ve got too much money withheld meaning you might be on the wrong tax code. Ok, it’s hard not to get excited when a decent payment hits your bank account!
That said, this money should have been yours all along, and you’ve got to check to see why you’re paying so much tax in the first place. It could just be a slip on your IR330 or, worst case scenario, you’re not filing your tax return correctly. Either way, talking with the experts could help you get to the bottom of the issue.
We don’t want you to treat your tax refund any differently from your weekly paycheck. This is your hard-earned money. Give it a purpose. Before you hit the shops, think about your personal financial situation. No, it’s never fun being a responsible adult, but it really does pay off in the future. Let’s take a look at how you can make those tax dollars work for you.
When in Doubt, Invest
Long-term investing is great for long-term goals such as sending a child to university or retiring early. If you want to put your tax refund to work to set yourself up in the future, consider diverting it to your KiwiSaver fund. Not only will you be squirreling a whole ton of money away for your future, you’ll also be earning interest that will help grow your nest egg. Best of all, you can use your tax refund to boost your investing portfolio while ensuring a tax break on the contribution the following year!
Set up an Emergency Fund
Did you know that without an emergency fund, just one unexpected major expense can send you into debt? Yes, financial experts often say that we should all have emergency funds, but with the costs of day-to-day living it’s easier said than done. Apparently a solid emergency fund should contain six to eight months’ worth of savings in an accessible interest-bearing account. Yikes!
Saving up that much money can take months or years depending on your salary, and if you’re just setting a little aside from each paycheck, it could take even longer. Tax refund time is a perfect time to build a savings fund. Use your tax refund to make a substantial deposit to your emergency fund. Unexpected expenses or a sudden job loss can lead to financial ruin, so a stash of money can be a lifesaver for taxpayers.
Pay Off High-Interest Debt
If you’ve been savvy and you already have your emergency fund, the next thing to do with your tax refund is eliminate any high-interest debt that you’re carrying. There are so many kinds of debt that we have to deal with, but it doesn’t have to be this way. Put your refund to work by paying off payday loans, title loans, debt consolidation loans, high-interest private student loans, car loans, and credit card debt.
If you receive an impressive refund, you can pay off such outstanding balances as student loans and pesky credit card balances. Pro tip: start by paying off the credit account with the highest interest rate and work your way down to the lower rate accounts. As much as you want to pay off that debt, you’ve got to be smart about it. If your debt is too large to clear, use part of your tax refund to make a lump sum payment, and then place the rest of the refund in your savings account for daily expenses.
Refinance Your Mortgage or Make Home Improvements
Ok, refinancing your mortgage doesn’t sound as sexy as taking a trip to Phuket, but it’ll save you a tonne of money in the long run. If you have a hefty tax refund, you’ve got leverage sitting in your bank account. Sweet, sweet leverage that you can use to negotiate a better interest rate at your bank. With some forethought, you can literally save thousands of dollars per year on mortgage interest.
So, what if you’ve already negotiated a good mortgage rate? Good for you! Now it’s time to take a good look around the house to see what you can pour your tax money into. Do you need a new energy-efficient water heater? Kiwis are DIY by nature and we know how home improvement projects can immediately increase the value of our properties.
Donate to Charity
You might not think of charitable donations as investments but every little bit you pour back into your community helps everyone. That’s a pretty sweet investment if you ask us. On a tight budget, making charitable donations is the first to go on a list of priorities. Your tax refund gives you the chance to give back, and it feels good too.
Sure, the returns on your investment might not be as measurable as investing in financial markets or your house, but if you donate to charity not only do you benefit your community, you can also claim the tax deduction.
Just Spend It On Something You Want
Yup, you read that heading right. You’ve saved all year and you’ve earned the right to splurge a little bit. Don’t feel guilty about using your tax refund as extra cash to treat your family to a holiday. Just try to keep things in perspective: a $200 refund is no excuse for a $10,000 cruise! You can set aside your tax refund as a savings fund for specific things that you want. Setting up a savings account with an established stash of cash is a great motivator – so if the above recommendations don’t apply to you, put it aside and save it for a good time at a later date. Putting your tax refund towards a specific savings goal will prevent you from taking on more debt later on when the need to spend arises.
Whether you’re getting $50 or $5000, your tax refund isn’t found money. If you’re smart you can make your tax refund work for you, improving your finances. The hardest part about getting a tax refund is filing the paper work. How do you fit in the time to file it right when you’re juggling all of your other responsibilities? Easy, by getting in touch with us. Tax experts can make sure you’re taking advantage of all the tax credits and loopholes you can to ensure a bigger refund at the end of the year.
Before you get in touch, think about what you want to do with your future tax refund. Then we can help make sure you get one!