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Turbocharge your tax cuts

While the government's banking on you spending it, the smarter move would be to commit your cash windfall - courtesy of recently announced tax cuts - to a new or existing savings plan.
By · 21 Oct 2020
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21 Oct 2020
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One of the silver linings heralded by COVID-19 was a lofty $17.7 billion in tax relief, which if you earn between $48,000 and $90,000 or between $90,000 and $120,000, could boost the annual income you receive as cash by as much as $2,295 and $2,745 respectively.

That’s great news, everyone’s a winner under moves to adjust tax brackets. If you lost income during COVID, chances are the tax cuts will help to cover the rent/mortgage and other essential items.

 

Time to take stock

But if tax cuts leave you with even more discretionary income – what’s left after basic living costs are covered - and you don’t already have good savings habits, you run the very real risk of frittering this extra booty away. The last thing you want to do is find you’re actually worse off financially, due to overspending your tax cuts, and racking up greater credit card debt (see table).

So before you start splashing extra cash, the smarter approach might be to first work out exactly how much your take home pay has actually gone up. Treasury also confirmed that it would backdate its announced tax cuts to 1 July this year, and lift the threshold at which the 37 percent applies.

While the extra amount you receive depends on your own personal situation, over five million Australians can expect to receive at least $2000 more in cash annually.

In light of this bonanza, why not take the opportunity to review your specific financial and non-financial goals, and how this extra cash will help you achieve them sooner? At face value, a notional $45 extra a week may not sound like a big deal.

But over time, investing these tax cuts into the market, can have a much greater impact on your finances than you ever imagined (see table).

 

What if you committed that extra cash to an investment?

Like it or not, keeping your extra cash in the bank is tantamount to keeping it under the mattress. It may well be safe from market volatility, but either way, it’s going to struggle to keep pace with inflation, which could progressively dilute its spending power.

Given that the Reserve Bank has made it clear interest rates aren’t going anywhere for at least three years, leaving money in the bank is a lost opportunity to grow your wealth. This realisation isn’t lost on millennials, with 40.5% in a recent survey saying they were planning to deploy tax relief into ‘general savings’, while 29.9% plan to put it towards a home deposit.

Thanks to improving financial literacy, more millennials also recognise that by putting their money to work in the market, as opposed to earning low interest (currently sub-1%) from a single asset class, like cash or fixed interests, they can potentially get into their first home years earlier. (See InvestSMART calculator for details).

 

Invest your savings in an InvestSMART ETF portfolio

Those wanting to take a more disciplined approach to saving for a specific financial goal, may wish to consider the benefits of investing in exchange traded funds (ETFs). One of the many benefits of ETFs is you’re putting your money to work in the market through a combination of defensive (cash, bonds and fixed income) and growth assets (shares and property).

With an InvestSMART ETF Portfolio, you get to decide how much you want to invest, and you can add to it whenever you want, or commit to regular payments that coincide with your pay cycle.

Having recognised that no two investors are the same, InvestSMART’s suite of low-cost ETF portfolios each offers a different diversification of defensive and growth assets. The shorter the timeframe within which you want to achieve your financial goals, the more conservative your ETF portfolio is likely to be.

In other words, an InvestSMART Conservative Portfolio has predominantly defensive assets to better reflect a lower appetite for risk. The opposite is also true, with an InvestSMART High Growth Portfolio being predominantly invested in growth assets to better reflect greater appetite for risk (over seven-plus years).

 

Unsure which InvestSMART portfolio is right for you?

By clicking through to our invest with us page, you’ll be able to match your investment time frame with the recommended time horizon of InvestSMART’s four diversified portfolios, so which one suits you best?

 

A good versus careless way to utilise your tax windfall

The misuse of tax cuts

Committing tax cuts to a simple, balanced investment

Knowing that he's going to have an extra $2000-plus to spend annually, Alex decides to get a credit card from a major bank.

While the card has a credit limit of $4000, Alex only uses half to buy a new 75 inch smart TV.

Instead of committing all of this tax relief of $180/month to clear his credit card debt faster, Alex chooses to pay the minimum monthly amount ($41 and decreasing), and spend the rest on going out, impulse buying and online gambling.

As a result Alex will take 18 years and eight months to clear his credit card debt – by which time he will have paid $3,961 in interest (~ at 18%), and $2,000 in principal:

Grand total paid: $5,691.00

Amount of tax relief saved/invested

Nil. Because Alex refuses to budget, he invariably overspends his extra pay.

Alex’s TV had a warranty of just one year.

 

https://moneysmart.gov.au/credit-cards/credit-card-calculator

Gladys decides to open up an InvestSMART Balanced ETF portfolio

Gladys decides to direct debit the $180 she receives in monthly tax relief into her InvestSMART Balanced ETF portfolio every month.

By the time Alex has paid off the debt on his TV in September 2038, Gladys will have amassed $68,835.

*Based on a projected annual average return of 5.99%.

The wealth that Gladys’s InvestSMART Balanced Portfolio has accumulated reflects the combined power of:

  1. asset diversification to offset risk
  2. capital growth
  3. monthly cash top-ups, plus
  4. the benefit of compounding returns.

 

https://www.investsmart.com.au/what-we-offer/wealth-planning

 

 

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