Tax refunds and investing in yourself

W1siziisijiwmtgvmdkvmtivmxk4m2mxzhrpbl9uzxdzmtgyos5qcgcixsxbinailcj0ahvtyiisijm0nxgymdujil1d

According to the most recent data available*, the average tax refund received by Australians is $2,574.

Given this is a reasonable amount by most standards, in one of our past animations, ‘Making the most of your tax refund’, we discussed several helpful spending suggestions for those of us that had received or were expecting to receive a tax refund for the 2016-17 financial year.

Importantly, the helpful spending suggestions that we mentioned are still very much relevant today. For example:

  • Establish an emergency buffer (e.g. for an unexpected event, such as job loss, medical/dental emergencies, home repairs or car repairs).
  • Repay or reduce debt (e.g. home loans, investment loans, personal loans, car loans or credit cards).
  • Invest in yourself (discussed further below).
  • Put towards savings (e.g. for children’s education fund, home deposit, home improvements, wedding, or a new car).
  • Spend it on the essentials (e.g. replacement of household appliances, car service/registration, or outstanding/impending bills payable).
  • Make a super contribution (e.g. individual or spouse contribution to grow your superannuation for future use in retirement or, if applicable, as part of the First Home Super Saver Scheme).
  • Take a holiday (e.g. domestic or international) to relax and recharge, so that you are refreshed and refocused for the year ahead.
  • Spend a portion on discretionary items (e.g. a nice meal somewhere or a new health and fitness smartwatch) to reward/spoil yourself just that little bit after your hard work throughout the year.
  • Make a contribution to an existing or newly established investment portfolio (e.g. invested in a diversified mix of shares and/or managed funds). Please note: Regarding establishing a new investment portfolio, this may depend on the tax refund amount received (and the ability to appropriately apply investment fundamentals, such as diversification), as well as considerations around your existing financial situation, goals and objectives.

Importantly, in terms of the helpful spending suggestions listed above, it’s vital to take the time to consider what’s relevant to you and how the appropriate use of your tax refund this year (and in following years) could make a difference to you now (and into the future).

With this in mind, arguably one of the most successful investors of all time, Warren Buffett, has been quoted as saying, “The most important investment you can make is in yourself.” We explore this quote within the context of one potential option for making the most of your tax refund this year; however, it also has broader application regarding how you may wish to approach life in general moving forward.

Investing in yourself
When we talk about investing, often it’s centred on accumulating and retaining wealth through investments inside and/or outside of superannuation – with an appropriate application of investing fundamentals, such as diversification, asset allocation, risk versus return, and liquidity, compound interest and dollar cost averaging.

However, there is another important area of investing that we have occasionally touched on in the past through several of our articles, videos and learning modules…it’s investing in yourself. In our animation (mentioned above), we provided examples of investing in yourself, in both mind and body, and explained the positive flow on effects of doing so from both a personal and work-related perspective. For example:

  • Allocating resources (time/effort/money) towards your personal life. This can include eating healthier, practicing mindfulness meditation, moderating alcohol consumption, giving up smoking, and being more physically active. Importantly, this may help with:
    • Improving your health and wellness now and in the future. For example, diet, stress, alcohol, smoking, and physical inactivity are all modifiable risk factors associated with the development of chronic diseases. By proactively targeting these modifiable risk factors, you may help reduce your chance of developing certain types of chronic diseases, such as heart disease, stroke, cancer, diabetes, respiratory disease or lower back pain.
    • Eliciting positive outcomes in certain areas of your personal finances. For example,
      • Your personal insurances and underwriting assessments. If you currently have a health-related loading (i.e. due to your BMI or smoker status), you may find that a movement in your BMI towards normalised levels or becoming a non-smoker (i.e. over a sustained 12 month period), may lead to a favourable reassessment by the underwriters, such as a reduction or removal of that health-related loading.
      • Your household expenditure. According to recent research^, in broad terms ‘healthy diets, which are consistent with Australian Dietary Guidelines (i.e. minimum recommended serves from the five food groups), are less expensive than current (unhealthy) diets consumed by the Australian population’. Put simply, healthy eating is not only good for your health and wellness, but also your hip pocket.

Please note: Another great way that you can invest in yourself on a personal level is by getting to know your Money Personality and beliefs on money, as well as increasing your financial literacy with the resources available on our Financial Knowledge Centre. Unlike the abovementioned suggestions, this may not cost you money (just a little time and effort). Furthermore, in terms of benefits, this can enable you to understand your natural personality preferences and beliefs on money better, as well as improve your knowledge of the topics that relate to your personal finances.

  • Allocating resources (time/effort/money) towards your work life. This can include an educational course or professional development program. Importantly, this may help with:
    • Expanding your knowledge and skillset now and into the future. By taking the time to upskill, you may find that this leads to one or more of the following,
      • A promotion. As a prerequisite, some promotions may require a higher level of skills and qualifications. For example, to move up into certain managerial roles, this may require the obtainment of the Master of Business Administration (MBA).
      • A pay rise in your next employment review. For example, new skills and qualifications may improve your salary bargaining power and your ability to emphasise your increased market value when compared to your last review.
      • An improvement in job security and stability. As society progresses, there will be technological advancements that lead to job loss or displacement. By recognising this, and understanding the jobs that are less susceptible to future computerisation/automation, you may be able to focus on ‘future-proofing’ the present (or future) job that you hold.
      • Other employment opportunities. By completing an educational course or professional development program in an area that is of interest to you, but not necessarily related to your current job, you may be able to make a shift in a new direction – to something that you have always wanted to pursue.
  • Eliciting positive outcomes in certain areas of your personal finances. For example,
    • Growing your superannuation for retirement. For most employees, their employer is required to contribute 9.5% equivalent of their ordinary times earnings each year as a mandatory Super Guarantee (SG) contribution. As such, each time you receive a pay rise, you may find that this 9.5% is being calculated on a higher amount, which is more often than not leading to an increase in the projected value of your superannuation account upon retirement. For example,
      • $60,000 income pa x 9.5% = $5,700 SG pa
      • $70,000 income pa x 9.5% = $6,650 SG pa
      • $80,000 income pa x 9.5% = $7,600 SG pa

Moving forward
If you have received or are expecting to receive a tax refund this year, it’s vital to consider what’s relevant to you and how the appropriate use of your tax refund this year (and in following years) could make a difference to you now (and into the future). Importantly, we can help you with making this decision by taking the time to discuss with you helpful spending suggestions that may be appropriate to your existing financial situation, goals and objectives.

Consequently, depending on your personal circumstances, these suggestions may not include investing in yourself this time around as there may be other areas that require your focus right now, such as repaying debt or establishing an emergency buffer. However, it’s important to realise and keep in mind the benefits that can be derived from investing in yourself – as seen above, you may earn returns that last your lifetime.