You've collected your receipts, you've filed your tax return, and - lucky you - you've got some tax refund money heading for your bank account. If you don't have any pressing bills, it's a great opportunity to get started with investing and we're going to explain how.
Whether you have $100 or $5,000 to work with, here are a few options to get the most out of your tax money this year:
1. Pay off consumer debts:
Let's start at the beginning. If you have a credit card or a personal loan, it is a good idea to pay off the debt before you start worrying about investing. The reason is these loans have extremely high-interest rates, often above 10 per cent. By paying down the debt, you're stopping that interest piling up and saving yourself on non-deductible interest repayments. If your credit cards or personal loans are charging 10 per cent or 20 per cent in interest, they're burning a big hole in your pocket. If your investments are earning just 5 per cent or 10 per cent, you would be better off paying that down before investing. Once you've paid them off, try to keep them paid off. You might even want to cut up your credit cards to help with this.
2. Start an emergency fund:
If you don't have any debt, a sensible next step is to start building up an emergency fund. The idea is that you put some money aside to use when the proverbial hits the fan. It might be that you lose your job or you have significant repairs to do at home. Having some money in an emergency fund can help reduce your stress during difficult times. It also means you'll have some money to draw on before you need to resort to credit cards or personal loans. Here are some things to keep in mind when it comes to emergency funds. Try to use your emergency fund for emergencies only. This is not a holiday account. Keep your emergency money in a high-interest savings account or an offset account if you have a mortgage. If you've got an offset or redraw facility on your mortgage, that can go towards your emergency funding. You can still access it, and it's saving you that 3 or 4 per cent [in mortgage interest] each year. Ideally, you'd like to end up with three months of expenses in your emergency fund, and while that goal might not be possible for everyone, something is better than nothing. If you keep chipping away, you might be surprised how quickly your fund grows.
3. Boost your super and the government might chip in too:
The mere mention of superannuation makes most people's eyes glaze over so before that happens, here's a little secret. It's called the super co-contribution. If you earn less than $38,564 and make a $1,000 after-tax contribution to your super account before June 30 next year, the Government will chip in an extra $500 to your super. There are some conditions you'll have to meet, but if you're eligible, it's a guaranteed 50 per cent return - far better than you'll get from just about any other investment. If you have earned more than $38,564 but less than $53,564, and you meet all the co-contribution eligibility requirements, the Government will chip in but you won't get the full $500.
4. If you have a long time before you'll need the money, you can get started in the share market:
Over the long-term, the best investments in Australia have been property and shares.
While past returns shouldn't be used to forecast the future, it's worth noting that over the 30 years to June 2019, an index of Australian shares returned 9.4 per cent per year. In other words, if you invested $10,000 in the share market 30 years ago, and got the average return, you'd have about $146,337 today. While property often requires considerable savings to get started, you can get started in shares with far smaller amounts. You do need to have some time up your sleeve though: We suggest that five years is about the minimum timeframe appropriate for investing in shares. If you're saving for a house in the next three years, putting the money in the share market isn't a great idea because you could end up with less than when you started.
We hope these suggestions have been of some use to you, and just remember, we're only an email or a phone call away.