With tax time just around the corner, now is the time to make sure you have all your financial ducks in a row.
June 30 is just around the corner, which means it’s almost time to file your tax return, and if you’re lucky it might mean a juicy refund will soon hit your bank account. But before you start making plans, read this handy guide for how to spend your tax refund the right way.
No, your tax refund isn’t free money
Firstly, let’s look at why your brain can’t wait to spend your impending tax refund. After all, it feels like free money, right?
The reason why is because our brains categorise it as ‘found money’. We treat this type of money differently from money we’ve earned through our job, or another expected income.
It’s all about the way our brains perceive value. When it’s ‘found money’, we value it differently, which can explain why we feel so compelled to splurge it as soon as we get it. Despite actually being no different to the money we earned through employment, the way it arrives in our bank accounts feels easier, and so we feel like we’re allowed to spend it more frivolously than the money we already have.
So wait, should I not be spending my tax refund?
It’s not that you shouldn’t spend your tax refund. But rather, you need to be aware of that ‘free money’ feeling to make sure you don’t impulse splurge on the first thing that comes to mind. Instead, deciding how to spend your tax refund should be a considered process.
Once you know how much of a refund you’re expecting, you can start thinking about different options. I like to look at my finances and life more broadly and explore different uses for the money. It’s ok to treat yourself or snap up something special you’ve been eyeing up, just be sure to plan it in advance.
For example, if you’ve got a savings goal, an upcoming trip, a big bill to pay, and something you want to buy, explore the impact of your tax refund on each of those things individually, and see which could improve your life the most. If you’re due a substantial refund, consider splitting it between two or three things.
The key is to consciously decide what you’re going to spend your tax refund on before it hits your account. Because having a sum of money come in without giving it a purpose creates the perfect environment for impulse spending and rash decisions. But taking time to give your money a purpose before you get it can help you to make more informed decisions – and be sure to follow through. Don’t fall into the trap of mentally spending the money several times over.
Beware of predatory advertising
Brands are increasingly advertising products and services targeted at consumers and their tax return and refund. Be careful of this messaging and try not to get sucked into special EOFY (end of financial year) deals on things you don’t really want or need.
Taking an active role in spending your tax refund wisely is critically important, especially during the cost of living crisis. Be smart with your tax refund and decide how best to spend it in advance – and yes, that can mean treating yourself, as long as it’s done mindfully.
Not sure what to do with your tax refund? Here are six smart ideas:
- Start an emergency fund, or top up your existing one to bolster the rising cost of living
- Put it into an offset account to reduce mortgage interest
- Open a travel savings fund
- Pay it off your HECS/HELP debt to minimise the impact of indexation
- Make a voluntary contribution to your superfund
- Use it to start up a side hustle to make money on your money.