The 5 best way to invest your tax return

Yippee, you’ve scored a good looking return from the tax office this year. While you’re tempted to blow the lot, if you invest your tax return carefully you’ll set yourself up for long-term wealth.

The ATO returned more than $1 billion to approximately 457,000 taxpayers in the 2019-2020 financial year. That’s an average return of just over $2,000. Which buys a decent television upgrade, an indulgent weekend away or a particularly luxe handbag.

Or, if you invest your tax return wisely, it can also buy you a ticket to financial freedom. Now, that beats a Gucci handbag any day.

To inspire you, we asked some of Australia’s leading financial experts what you should invest your tax return in. Here’s their top five picks.

Pay down your debts

Yes, it’s a boring way to invest your tax return, but also yes, it makes the most sense.

“Trying to get ahead while paying down debt can be like working with a leaky bucket,” warns Ben Nash, Founder of Pivot Wealth and author of Get Unstuck. “Two steps forward and one step back. Your tax return can be an opportunity to accelerate how quickly you ditch your debt and make your other money goals easier.”

One of the best ways to use your lump sum to pay down your debts is the snowball method. This involves paying off smaller debts first and gradually working up to larger loans.

Find out more on this and other methods here:

Reinvest in your education

Chris Gray, Investment property expert and founder of Your Empire, puts his money on your education. Your financial and property education, that is.
“Reinvesting your tax refund is definitely a good thing, especially if it towards buying your first home or investment property,” he acknowledges. “However property often increases by more than you can save, which means technically you’re almost going backwards everyday. I often suggest using a proportion of your savings towards your own education as that knowledge can often allow you to get into the market much quicker.”

Gray suggests investing in books and seminars in the area you want to invest in. “If someone has travelled the journey before you, they can often give you shortcuts,” he says. “Ways to save money and plenty of tips on how to buy better.”

To illustrate the wisdom of this investment, Gray tells the story of James Brown, a 20-year-old with $10k deposit. “He decided to reinvest $4k of his savings into a property development course (not one of mine). That led him to building a network of contacts, a part-time apprenticeship and then his first property, purchased with a cousin. That property has since grown $150k in under 12 months and he’s just bought his second property at the age of 21 all by himself.

“It just goes to show how sometimes you’ve got to spend money to make money,” Gray says.

Nash agrees with Chris that investing in yourself is good use of your tax return money. “Furthering your skills and education can help increase your earning potential and help you reach your money goals and targets faster,” he notes. “Short courses, formal or informal education, or online learning are all often tax deductible under the ATO guidelines, so investing in upskilling often also has the double boost of increasing next year’s tax return.”

Invest in the sharemarket

Nash also thinks that buying shares is a smart way to start building your assets and wealth. “Investing in the sharemarket is often one of your first big steps to financial security,” he says. “But you should understand that because of the ups and downs of the market, investing in shares should be seen as something you do for the medium to long term.”

If you invest your tax return in the sharemarket, over time you will grow a second income stream. This diversifies your income and protects you long term from job loss and general life ups and downs.

WATCH: Anyone new to investing should check out this video.

In particular, put your money into equities

Josh Gilbert, market analyst at eToro, would head straight for the European equities.

“[Right now], they are relatively cheap when compared to US equities, which signals an opportunity for investors after years of outperformance,” he says. “Europe’s cyclical indices make the region more sensitive to the re-opening rebound, and therefore, it is expected that European equities will outperform moving into 2022.

“This, combined with continued earnings growth which is higher than US equities, makes European equities a standout investment option. To gain exposure, investors can look at ETFs such as iShares Core MSCI Europe and Vanguard FTSE Europe ETF.”

If you’re keen to stick closer to home, learn more about investing in the Australian sharemarket. Tune into The Call on Ausbiz each weekday at 12-1pm AEST for Kochie’s panel of expert recommendations. You can also check out the The Call Fantasy Portfolio to see what they have recommended buying and selling each week. The panel does very well indeed, with last year’s fantasy portfolio up 34.58 per cent for the year.

Build your emergency fund

One startling fact that has recently been revealed is that almost 20 per cent of Australian households couldn’t raise $2K in an emergency. For this reason, Nash also advises that you invest your tax return in growing your emergency fund.

“The reality is that many Aussies don’t have enough cash savings to cover them against the unexpected,” Nash says. “A solid war chest will help give you confidence to follow your other money and investing goals, and give you peace of mind.”

That seems like exactly the right way to invest your tax return. So, don’t by a TV. Buy some peace of mind instead.