Tips on how to make the most of a tax refund

A tax refund looks like a gift when you get it. It’s not. It’s simply IRD returning funds that you have already overpaid in tax in the previous financial year.

Rather than spending it on an impulsive purchase, think about how it could really benefit you.

Set up an emergency fund

Unexpected expenses can knock us around- car repairs, medical and dental expenses or emergency travel to assist family members, all add to your normal stress levels. Using your tax refund to set up a separate bank account just for emergencies, can give you some comfort in the knowledge that you can cover some if not all of those unexpected costs.

Save for something specific

Have you been planning to upgrade your television or an appliance that’s on its last legs? Do you have a big birthday to celebrate or Christmas gifts to cover? Set aside your tax refund into a high interest earning savings account until you’ve reached your savings goal.

Make a lump sum payment onto high interest debt

Reducing your debt is always recommended and paying it off faster by adding a lump sum payment into the mix, reduces interest payments and service fees. Paying of your debt faster will also have a positive effect on your credit score which will make you more attractive to lenders if you need to borrow in the future.

Make a contribution into your Kiwisaver

If you have a retirement plan and you are contributing monthly, adding a lump sum from your tax refund can make a big difference to your balance in the long term. Your fund accumulates over the years with compounding interest.

Invest in your skills

If there is a new skill you want to learn that could help you to move up the ladder at work or enable you to get a higher paying job, then investing your tax refund in specific training makes perfect sense. If extra training means that you can increase your income by say 25%, you can use those gains to put into savings or pay off debt faster. More than anything, learning a new skill gives you confidence and a sense of achievement which no amount of money can buy!

Protect your family with Life insurance

A tax refund is often money you didn’t budget to get. So, using that lump sum to insure your life, will give you and your loved ones peace of mind if the unthinkable happens. If you are the main earner in your family, and have dependent children, a spouse or parents, then protecting your family will take the stress and financial hardship away should something happen to you. There are a number of online insurance calculators so you can see how easy it is to set up and how much you’ll pay every month to get the cover you need.

Note: If you earn a salary, wages, or superannuation, your tax refund is automatic if you are eligible for one. If you are in a different work situation you can apply for a tax refund. The best time to apply is between March and June as you will receive your tax refund more quickly. In 2019, the average tax refund paid out by Inland Revenue was $430.00. For more information about tax refunds, check out www.ird.govt.nz