Smart ways to make the most of your tax return

As the 2023 income tax season starts in South Africa, where taxpayers will soon be receiving their refunds, it's essential to consider how to utilise these windfalls wisely. While it may be tempting to indulge in a shopping spree, taking a moment to pause and think about your financial future can make all the difference.

We asked Stian de Witt, CFP®, executive head of financial planning at NMG Benefits for his top tips on spending a tax pay-out wisely.

Reduce your debt

At a time when interest rates are soaring, any money you owe is becoming more expensive to service every month. A smart way to use your tax refund is to reduce your debt, starting with unsecured debts that generally attract the highest interest rates, like store cards, credit cards or personal loans, says De Witt. 

Bulk up your RA

If you take your tax pay-out and put it into your retirement annuity, you're effectively setting yourself up to get another tax refund on you refund, as it were. At a 45% tax rate, you'll get R4500 back next year on every R10000 you put into your RA now.

Create an emergency fund

Everybody should have an emergency fund for life's little curveballs, says De Witt. "If you don't have at least R15 000 sitting somewhere for when disaster strikes, this is a great way to use your tax pay-out. Your future self will thank you one day."

Put your money to work

"I often suggest to my clients that they invest windfalls into vehicles like tax-free investments – note, not tax-free savings – or even unit trusts," says De Witt. "Unlike tax-free savings, these types of investments will typically out-perform inflation every year, leaving you with a tidy nest-egg in the future.

Top up your pension fund at work

If your company's pension fund allows it, putting money into this fund is always a solid investment in your retirement funds – and it's cheaper than a RA, says De Witt.

Ultimately, any investments you make with your windfall should be part of a proper financial plan – and proper financial planning starts with setting goals. Good examples of short-term goals are setting up a budget, paying off debt and contributing towards an emergency fund. Medium-term goals could include setting up life, disability and funeral policies. Your long-term goals range from buying a house to financing your children's education.

"And if you're still not sure what to do with a windfall, speak to a financial adviser. A qualified advisor can help you save more money and grow your money faster. It's important to find a financial advisor that can partner with you for life, someone who gets to know and understand your unique circumstances," says De Witt.