Make the most of your tax refund, bonus or other windfall

Smart ideas and considerations for how to make the most of your tax refund or financial windfall.^disclaimer

So, you’ve received a financial windfall perhaps from a tax refund, inheritance, employer bonus or lottery win, now the next question is… what are you going to do with it?

The natural options people would usually consider are spend or save, right? Well maybe not. Another way to look at it is as follows:

Past – What debts or obligations have you accumulated?
Present – What do you need right now? What do you want right now?
Future – How do you set yourself up to succeed financially?

Past - Debts and obligations

As most of us know, debts are a normal part of life for most people these days, in one form or another. Paying down debts is always a good idea but make sure that your debt reduction doesn't come with strings attached.

Credit cards

It's best to be savvy when it comes to cards and avoiding unnecessary costs. Paying off the debt is preferred but if you have a remaining balance, this is your opportunity to review your account and consider a lower interest option. If your card is on an interest free period and you have other debts, it may be more beneficial to focus on reducing debts that incur the higher charges first.

Loans

One good debt reduction strategy is to pay off any loans early, so that you reduce the interest that you have to pay. But before you make an early repayment, make sure you check whether there are any fees or penalties which apply. Things to consider:

Are there any caps or limitations to how much extra you can pay without penalties applying? Are there any early repayment fees?
Is there an offset account option that could help reduce the interest you pay?
Read the fine print or check with your lender to get all the information before making a lump sum payment.

Present - What do you need or want right now?

When looking at what to spend right now, it helps to be clear on what is a ‘want’ and a ‘need’. Keeping this in mind will assist you to make smart decisions on your short term purchases.

Education/upskilling

You may feel ready for a new challenge or a change in career. It may be time to look at signing up for a course that interests you and helps to upskill ready for the next phase of your life.

Health and wellbeing

This windfall may be the perfect opportunity to get that much needed dental work done or, perhaps, a new pair of glasses. It’s easy to get bogged down by day-to-day life and forget to focus on ourselves. Consider how much you need/want to spend and ensure that the benefit is there.

Retail

Don’t feel guilty in replacing your worn-out items. However, it’s very easy to lose track of how much you’re spending so, set yourself a budget and be quite targeted in your purchases so as not to suffer from buyer’s remorse later.

Holiday

You may be fortunate for your windfall to be enough to cover an entire holiday and may already be surfing the internet for the nearest tropical destination but, hold on a minute. You’ll need to book flights and annual leave from work, perhaps get a passport and all of this takes time. In addition to finding the best flight deal, consider safeguarding your accommodation and spending money by looking at options to put the funds into a short term deposit and earn some interest, ready for your big trip.

Future - Kick start toward your goals

Let’s face it, the life we want costs money. This is why the focus on future is essential regardless of your tax refund or financial windfall amount – but it’s a great kick start.

Boost your super

The experts are saying that a lot of us won’t have the funds we need for the retirement we want. Adding to your superannuation as early as possible allows time for the money to grow further in preparation for your later years.

Pay it forward

No, this has nothing to do with the movie or giving your money away to strangers but, more about paying for the year ahead. For example, you could pay in advance for a year’s worth of car registration, health insurance, gym membership or home internet service. Taking the pressure off your regular income enables you to focus on achieving your goals.

Emergency fund

Having money for a ‘rainy day’ isn’t just a well-known phrase but it can be a lifesaver in times of need. All it can take is one thing to throw your finances off course and this is where your emergency fund is your financial parachute. Set up a savings account solely for this purpose and leave it there earning interest until… it rains!

Save for holiday, home, boat or car (big stuff)

To save for the big stuff, firstly, you need a savings goal and using your tax refund or financial windfall is a great start! Secondly, you’ll need to work out how much you can save on a regular basis to help you get there!

Find out how much you can save

What next?

Now that we’ve explored some of the many options for your tax refund or financial windfall, you’ll need to decide how to focus your funds - all of it on 'Past' or splitting it out across Past-Present-Future. It’s up to you, but if you need it, we can help.