Three Ways to be Wise With Your Tax Returns

Year round we pay tax to the government to pay for public goods and services that we use everyday, such as health and community services, national defence, education and infrastructure, like roads and railways. These contributions help to improve the well being of our society and it's around this time of year that hard working individuals get a little back of what they have been paying out in their wages.

It is pretty simple really.

At the end of the financial year we calculate our taxable income to see whether we have paid more tax than we had to, and if this is the case we are entitled to a tax refund. That said, some of us find we have not paid enough and so have outstanding tax to pay to the government. It is our legal right to minimise our tax, but we cannot avoid tax.

Right now, you will be thinking of your tax return, and so I urge you to talk to your accountant and not only get the best return you can today, but more importantly plan for the next year. So, today I wanted to talk to you about ways to invest your tax returns.

In Australia, the average tax refund for an individual is $2,574, which is very nice indeed, but all too often individuals are not being wise about how to invest this money to build wealth. So I share with with three ways you can invest your money wisely.

Some spend it on goods such as a new TV, the latest phone, a new couch, holidays and the list goes on. Here are 3 ways that you can make the most of your tax returns:

Save it 

Would it surprise you that only 21 per cent of individuals save or invest their tax returns. This number is surprisingly low and what’s even more worrying to me is that we are seeing a generation of young individuals growing up with poor money management skills. 

On average, only 12.7 per cent of 25-35 year olds save money with the top three savings goals including: saving for a holiday, saving for a rainy day and to buy or renovate a home.

A survey conducted by the Commonwealth Bank of Australia found that 56 per cent of people would not have enough savings to handle a temporary loss of income and one in three Australian households would be unable to find $500 in the event of an emergency. Now I am not sure about you, but I find this is an alarming number.

When you receive a tax refund you got it from your hard work and so it just makes sense to put money aside and build your future rather than spend it on unnecessary goods.  

Invest it

Individuals who see the real value of their tax returns know that the money is far better off being invested than just saved. This is quite simply because just saving your money won't make your rich. 

Investing your tax returns is one of the best strategies to accelerate your wealth in the long run. In fact, that little boost to your investing each year can have a dramatic effect on your wealth at retirement through the compounded growth it will achieve.

Receiving that extra amount of money each can and will make a big difference, if you investing your tax returns into the stock market every year. Even if you don’t beat the market and receive the average return of 11.4% p.a., over 20 years by investing your annual tax return of $2,500, you could make $195,339. 

That’s almost an extra $200,000, all from simply investing your tax returns alone!  

Pay off your bad debt  

One of the most overlooked and important ways to be wise with your tax returns is to pay off your debt. The average loan or credit card debt for an individual is $4,437 with the average interest repayments p.a. of $731.18. 

You might like to visit one of the many mortgage calculators on the web and do an example of depositing $2,500 each year as a one off payment to see how dramatically it decreases the time to pay off your house and, more importantly, how much interest it will save you.

Around the world managing debt is challenging for many people, so every little bit you can do to minimise the interest you pay is very worthwhile. 

When it comes to tax returns, using it to get out or reduce debt is one of the best ways to utilise your tax return dollars. So there are the three ways you can be more wise with your tax returns and take control of your finances.