Putting your tax refund to work

The arrival of a tax refund can be a welcome relief and a tempting opportunity to get something you’ve been wanting. Before you splurge, stop. In the current economic climate, marked by rising living costs, mortgage rate increases, and climbing rents, your decisions with this lump sum can impact your financial stability, and this year, it is worth thinking about how this extra money can work for you.

As we all know and experience, general living costs are cutting into family budgets at levels we haven’t seen in a long time. Most Australians have had to do more than tighten their belts, and paying for essentials such as groceries, power, fuel, clothing, etc., has meant dipping into savings or relying on credit cards. Using your tax refund to pay down credit card debt is smart. This decision reduces the financial burden of high-interest payments and lowers monthly expenses. It can help free up cash flow or assist in getting the savings budget back to parody.

The interest rate rises during 2023 are well documented and have financially impacted many Australians with mortgages. The ripple effect is profound, and there seems to be little indication that interest will begin to decline anytime soon. In some financial circles, there is talk that they will remain steady, with some chance they may even go up before the end of the year. This can be particularly stressful if you’re already feeling the pinch from other rising expenses.

Applying your tax refund as an additional mortgage payment can lower your principal balance, reducing the interest you pay over the life of the loan. Even a modest lump sum can make a significant difference, especially when interest rates are high. Applying your tax refund as a payment on the mortgage principal can increase its value by three to four times in interest savings. This small strategy effectively increases the primary value, making the refund work harder for you.

Renters are not immune to financial pressures; escalating rent prices and a squeezed rental market make the market tricky and expensive. A combination of factors contributes to the current rental market conditions, including a shortage of available rental properties, increased demand for housing, and the rising cost of property maintenance and ownership. These elements create a competitive market where rental prices are driven up, leaving tenants with higher monthly rent obligations. We highly recommend using your tax refund to pay down debts, such as credit card balances or personal loans. This strategy reduces your monthly obligations and increases your ability to handle rent increases and make timely rental payments, maintaining your rental reputation. You can put your tax refund to work by safeguarding your rental commitments.

If you’re in a position of having minimal debt, you should consider using your tax refund to bolster your savings. In financial planning we advise our clients to have an emergency fund. An emergency fund is a fundamental component of financial security, providing a cushion for unexpected expenses such as medical bills, car repairs, or job loss. We recommend three to six months’ living expenses in your emergency fund for peace of mind and to mitigate the need to rely on high-interest credit in times of crisis.

Saving is an addictive habit, and seeing your savings grow is a great feeling. A healthy savings account provides flexibility and financial freedom. You can make choices in your best interest rather than being forced into decisions by financial constraints. For example, you might be able to take advantage of a career opportunity that requires a temporary pay cut, invest in further education or training, or even take a well-deserved break without financial strain. Your tax refund can be the missing piece, enabling another opportunity where your tax refund is working for you.

This year, make your tax refund work for you. It will take strategic planning. Prioritising debt repayment, whether it be credit cards, personal loans, or an extra mortgage payment, will create a multiplier effect. Adding your tax refund to your emergency fund helps cement your peace of mind, and adding it to your savings account fast tracks your goals. By making the strategic decision to put your tax refund to work, you set yourself up for a win-win result and in volatile economic times, we take every win that comes our way.

Step Up Financial Group is a team of qualified financial specialists. Every year, we help hundreds of Australians create financial stability and build toward a confident retirement. Contact us today for experienced, compassionate, and professional financial planning advice.