Four ways to get the most bang for your buck when spending your tax refund





Tax season is in full swing and for millions of South Africans that means receiving a tax refund, with Sars already setting a record for paying out the highest amount in refunds in over two decades, which is welcome news for South African consumers who are facing increasing financial pressure due to rising inflation, petrol hikes and rocketing interest rates.

If you are lucky enough to get a tax refund, you must think carefully how to use it to ensure you get the most benefit out of it.

With the current tight financial times, there are few people who can still go out and splurge when they get a refund from the tax man.

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Plan ahead for your refund

However, to avoid spending tax returns frivolously and falling back into bad financial habits, taxpayers should consider ways to use their refunds in constructive ways that will benefit them eventually, says Tonia Pavlou, deputy CFO at consumer finance firm, RCS.

“The most effective way to spend your tax return is to decide what you will do with the extra money before it reaches your bank account. Most taxpayers do not factor their refund into their budgets and when they receive the money, they see it as a bonus or extra spending money.”

However, with a bit of foresight and a shift in mindset, you can use your refund to improve your financial situation, she says.

“Many cash-strapped South Africans have been forced to put their wants on hold to attend to their financial responsibilities and a tax refund may therefore be a way of finally obtaining those wants.”

She says a possible way to appease this need for gratification could be to spend a small portion of about 10% on self-care, spoils or gifts. You can then use the rest of the money to contribute to your emergency fund, invest in a tax-free savings account, pay to further your education or pay off debt.

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Contribute to your emergency fund

As South Africans have a poor savings culture in general, as demonstrated by research by FNB, that 80% of middle-income earners have little to no access to emergency savings, an emergency fund is very important.

The unexpected onset of Covid-19 highlighted the importance of having access to savings for unforeseen events.

“Extra funds could help tide you over in the event of a sudden job loss, a medical emergency or car repairs. Generally, the rule of thumb is that emergency savings should amount to about three months’ worth of your monthly salary. Using your tax refund to supplement this fund will help you to mitigate risks and bring you valuable peace of mind when the unexpected occurs.”

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Invest in a tax-free savings account

Tax-free savings accounts are a great way to maximise your savings and earn returns without having to pay tax. Pavlou says the great part about tax-free savings accounts is that they do not require large investments, with the maximum you can invest in a tax-free product R36 000 per year, which makes it an effective way of saving in small increments and earning maximum results.

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Pay towards furthering your education

One major advantage to emerge from the pandemic was a boom in online education and learning technology and Pavlou says the options available to South Africans are vast and include short courses at some of the leading tertiary institutions of learning, such as Harvard and Oxford.

“Locally, we have also seen several key players emerge in the education technology space, boosted by revenue from venture capitalists who see value in the evolution of digital learning. Using your tax refund for a short course, workshop or training programme will produce long-term benefits for your career and is a much wiser way to spend the extra money than using it for a product that will ultimately depreciate.”

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Tackle your debt

One of the most effective ways you can spend your tax refund is to use it to reduce your debts, Pavlou says. “You could pay an amount towards a mortgage, a business or personal loan, a store or credit card. A major advantage of making a payment towards your debt over and above your monthly instalment is that doing so may reduce the amount you have to pay on a monthly basis, which will free up more cash to use month-to-month.”

Secondly, she says, getting ahead on your debt repayments will help to increase your credit score, decrease your credit utilisation ratio and reduce the amount of interest you have to pay.

“South Africans have to shift their mindset from seeing a tax refund as money for a long-awaited shopping spree, to seeing it as an investment. This will help in the transition from the need for instant gratification to taking a longer-term view on financial wellness.”