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So you have been told by your account that you are going to be receiving a tax refund this year and  you have the feeling of excited anticipation as you sit dreaming of what you will spend it on. But before you get carried away I would like to be talk to you about really making your tax refund work for you.

If I use the examples of $500, $1,000 & $5,000 then I think it will cover a broad range of people and their situations.

Because each one of us likes to be able to spend money when it comes into our hands I think a great rule to follow is the SSD3 rule:

  • Spend a third
  • Save a third
  • Pay a third off your Debt

Let’s look at what your tax return could achieve if you saved a third and paid a third off your debt

$500 by 1/3rd $166.67$1,000 by 1/3rd $333.33$5,000 by 1/3rd $1,666.67
Save $166.67 saved and added to every year could reward you with over $2K after 10 years at our present low interest ratesSave $333.33 saved and added to every year could reward you with over $4K after 10 years at our present low interest ratesSave $1,666.67 saved and added to every year could reward you with over $20K after 10 years at our present low interest rates
Pay off Debt $166.67 paid off a $300K loan every year for the term of your loan would reduce the term of your loan by approximately 6 monthsPay off Debt $333.33 paid off a $300K loan every year for the term of your loan would reduce the term of your loan by just over a year  Pay off Debt $1,667.67 paid off a $300K loan every year for the term of your loan would reduce the term of your loan by just under 5 years  

You can see from the above table that because of our low interest rates at the moment, saving does not give as  much value to your tax return dollars as paying down debt and so you may conclude that it may be just as valuable for you to forget saving a third and  spend two thirds instead! But WAIT JUST A MINUTE. You may feel like you value that nice new pair of shoes, or the latest gadget that you have been thinking about but before you race off and buy something that loses its value as soon as you purchase it, let’s have a look at what 2/3rds of those dollars paid off your debt would look like:

  • $500 = $333.34 means that you could reduce the term of your loan by just over a year
  • $1000 = $666.67 means that you could reduce the term of your loan by just  over 2 years
  • $5,000 = $3333.34 means that you could reduce the term of your loan by just over 8 years

Well now it is getting exciting – paying down debt with your tax return every year can reduce the term of your loan considerably and save you thousands in interest. So let’s get you really maximising your tax return……

  • A $500 tax refund paid of your debt in its entirety every year, would mean – you would reduce the term of your loan by just under 1.5 years
  • A $1,000 tax refund paid of your debt in its entirety every year, would mean – you would reduce the term of your loan by  just over 3 years
  • A $5,000 tax refund paid of your debt in its entirety every year, would mean – you would reduce the term of your loan by just under 11 years

Of course if you have no debt then you probably should thinking about using your tax refund to spring board you towards an investment portfolio – but that’s a subject for another day.

Until next time, happy budgeting:)