The 5 best things you can do with your tax refund

If you are lucky enough to get a tax refund this year, you might be considering all the different things you can spend the money on.

Not to be a partypooper, but there are many different ways Australians could make better use of their tax refund. Here are 5 of my top ideas…

  1. Pay down credit card debt. Australians owe $31.9 billion on credit cards, with the average balance being $4,334 according to ASIC’s MoneySmart website. The average interest we pay to the banks on each credit card is $729 a year.
    If you have a balance of $4,400 and repay the minimum balance each month and don’t spend anymore it will take you 31 years to pay it off and cost you $14,900 in interest.
  2. Put it on your mortgage. You are probably paying around 5% per annum on your mortgage, and you can’t claim the mortgage interest against your taxable income – unless it’s for an investment property. So you may as well go ahead and throw your tax return against the mortgage. Stick at it each year and you’ll find that your mortgage balance will come down much more quickly.
  3. Put the funds into a low-cost index fund. If you have an online broking account, it’s cheap enough to buy an index fund – and the minimum you need is $500 (plus brokerage costs).
    If you want to invest in Australia, you need to know that the top 10 stocks on the ASX comprise around half of the index, so you are basically buying shares in the banks, the two supermarkets, Telstra Corporation Ltd (ASX: TLS), CSL Limited (AS: CSL) and BHP Billiton Limited (ASX: BHP).
    There are several exchange traded funds (ETFs) tracking the Australian market. You can find a complete list on the ASX website, or you could simply pick the Vanguard ASX 300 Index – V300AEQ ETF UNITS (ASX: VAS) which tracks the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) index.
  4. Save it – everyone needs an emergency fund 3-6 months of salary for life’s unexpected events. Keep it in your mortgage offset account – that helps pay down your mortgage – and you can still access it. Investors should also remember that cash offers flexibility and a degree of optionality should markets turn down. One of the worst things you might face is a tumbling share market, but no cash to put to work picking up bargains.
  5. Donate it. Australia’s charities constantly struggle to raise cash. If you aren’t going to miss the funds, then by all means donate your tax return to your favourite charity.

Foolish takeaway

Many of us have good intentions before we get our tax refund, only to blow it once we receive it. Here’s an idea – rather than get the funds put into your everyday spending account – pick one of the above and direct the tax refund into a different account and make better use of your return.

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Motley Fool writer/analyst Mike King owns shares in Telstra and CSL Limited. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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