A couple of weeks ago, our On The Dex spotlight article focused on what you need to do to prepare for tax time. We learned that in Australia, over 14 million people lodge a tax return each year, with roughly two-thirds expected to receive a refund, averaging around $2,800. This got us thinking about what could be done with that money. The answer—a lot!
Here at Elladex we love the saying "have a plan or plan to fail," and it rings very true here too.
If you don’t have a plan or strategy for how you will use any money—whether it’s your regular paycheck or what feels like a little bonus, like your tax refund—you're missing out on opportunities.
It's tempting to have a little splurge on a holiday or shopping spree, but what if we told you that with a bit of strategy, that $2,800 each year could grow into something substantial over time—like, say, over $200,000?
Here's how the average 40-year-old can turn that modest tax refund into a small fortune by making smart financial choices:
If you consistently invest your tax refund every year, you could be looking at sizeable investment thanks to compounding interest. Let’s break it down:
-Annual Investment: $2,800 (average tax return)
-Investment Period: 25 years (from age 40 to 65)
-Average Annual Return: 8%
This regular annual investment each year could end up around $235,000 by the time you reach 65.
Boosting your superannuation with your tax refund is another excellent long-term strategy.
-Annual Contribution: $2,800 (average tax return)
-Investment Period: 25 years (from age 40 to 65)
-Superannuation Growth Rate: 7% net of tax
By adding your tax refund to your super each year, you could grow your super balance by approximately $200,000 by retirement, depending on your fund's performance and fees. Plus, based on your taxable income and the way you make the contribution, you might also enjoy more tax deductions. It's a win-win!
Are you one of the 3.2million Australians with a home loan? Here is how that tax refund could help.
-Extra Annual Payment: $2,800
-Home Loan Interest Rate: 6%
-Loan Term: 30 years
-Average Loan Balance: $600,000
By using this money to pay extra off your loan, you could potentially save over $100,000 in interest, plus shave years off your loan term.
Investing in YOU can pay big dividends. You could use your tax refund to take a course or further your education. If this education leads to a promotion or a new job with a $10,000 annual pay rise, you’re already way ahead. Let’s look at the math:
-Investment: $2,800
-Annual Pay Rise: $10,000
-Period: 25 years (from age 40 to 65)
In very basic calculations, that extra $10,000 per year adds up to $250,000. Even after accounting for tax and other deductions, you’re still looking at a substantial net gain.
You are your biggest asset—your ability to earn income and fund your lifestyle is invaluable. Investing in income protection insurance ensures you have a safety net if you’re unable to work due to illness or injury. This type of insurance typically covers up to 75% of your income. The cost will vary dramatically depending on your age, income, occupation, and health status so getting advice from a financial adviser is important.
Consider this: you're offered two employment options.
Essentially, income protection is like choosing option 2. You're forfeiting some of your income to fund insurance premiums, but in return, you're gaining peace of mind and financial stability when you need it most. Unlike the other examples, this is one investment you hope you never have to use but will be very glad to have.
While it’s always fun to splurge a little, consider the long-term benefits of investing your tax refund wisely or finding a happy medium between the two. Whether you choose to invest in shares or yourself, pay off your home loan, or supercharge your superannuation, each option has the potential to significantly boost your financial health over time.
So, if you are on the receiving end of a tax refund, no matter what the size, think beyond the immediate gratification and consider smart moves you can make to help you achieve financial security and build wealth in the long run.
Your future self will thank you!