How to be smart with the upcoming tax cuts
The average Australian will soon save $2143 every year from tax cuts and if you’re smart, this is what you’re going to do next.
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Every Aussie taxpayer will receive a pay rise on July 1 with the new stage three tax cuts kicking in, and it couldn’t come at a better time as millions struggle with a cost of living crisis.
For a working earning the average income of $1889 per week, the new tax cuts mean paying $2143 less tax every year, equivalent to an extra $178-per-month in your pay packet.
No doubt some of this pay rise will be absorbed into spending, but if you’re smart, you’ll use at least part of this extra money to help you get ahead.
Avoid the spending cycle trap
Parkinson’s law says that we tend to consume what we have available. This is why if you’re working on a work project, uni assignment, or just trying to get through a to-do list, you tend to use all of the time you have available.
When it comes to money, it’s why people tend to spend most of their income, regardless of how much they’re getting paid.
The risk with these pay cuts is that without a clear plan or approach, it’s likely that if you fast forward six months, you may be in exactly the same financial position, saving at the exact same rate as today, and feeling the same about your money – even though you’re getting paid more.
If you want to avoid falling into this trap, you need to take a different approach.
How much are these tax cuts?
How much extra money you’ll receive in your pay packet after tax is different for everyone.
A person on an income of $50,000 will take home an extra $77 a month.
A person on an income of $75,000 will take home an extra $130 a month.
A person on an income of $100,000 will take home an extra $182 a month.
A person on an income of $125,000 will take home an extra $252 a month.
A person on an income of $150,000 will take home an extra $311 a month.
A person on an income of $175,000 will take home an extra $311 a month.
And a person on an income of $190,000 or more will take home an extra $377 a month.
You can see that every tax payer will benefit, and the higher your income the more tax you’ll get.
How to use the money to get ahead
If you want to use some or all of this extra money to get ahead, there are four main options for you to consider.
Which one you choose will depend on where you’re at and what’s going on with your money. But choose carefully, as the path you choose will dictate how quickly you get ahead, not just this year but into the next few years.
Pay down debt
If you have debt and are trying to save, it’s like taking two steps forward and one back.
You can make progress, but it will be slow going and hard fought.
If you have personal debt with a high interest rate, you can end up spending a lot of money on dead interest costs, so this option is worth looking closely at.
Build your savings
Saving money in a high interest savings account can give you peace of mind, give you money for the unexpected, and help you achieve savings goals like building a property deposit. These are all important things that are good to have in your life.
That being said, you should keep in mind that with the average interest rate on savings accounts today sitting around 5 per cent, the fact this interest income is taxable at your marginal tax rate, and the fact inflation today is 3.6 per cent, your money is going backwards in real (after tax and inflation) terms.
This means you’re never going to get wealthy by saving money in a bank account. If getting ahead is something that’s important to you it’s likely you’ll need to consider one of the investing options below.
Buy shares or ETFs
Buying shares, funds, ETFs, or investing through an investing app can be a solid way to get ahead. Particularly with the investment apps (micro investing) you can get started with as little as $5, and build from there.
The long term return on these sorts of investments is 9.8 per cent, which means that for a 20-year-old, investing even as little as $5 per day would grow to $1,486,241 by age 65. You don’t have to do a lot, but if you’re doing it over a long period the power of the sharemarket and compound interest will do the hard work for you.
Invest into property
Saving the best for last here. When it comes to investing, property tends to win over shares and other investments because of the power of leverage (borrowing to invest). When you buy a property, you typically save up a deposit and then combine your savings with money borrowed from the bank to buy a much larger investment, and simple maths shows us that a larger investment will grow more than a smaller one.
But you need to tread carefully here, if you’re thinking about buying property as an investment you need to choose your property wisely. A good property will help you get ahead, but a not-so-good property will slow you down, likely for years (sometimes decades).
When your primary goal is to make money, you should be squarely focused on finding a good property that will grow in value over time.
The wrap
If you want to use the new tax cuts as a lever to help you get ahead, not just keep up with today, you need to approach this opportunity with a plan. First step is to get clear on how much extra you’ll receive in your pay from July 1, and then think carefully about how you want to allocate this extra money.
Given this comes in the middle of a cost of living crisis, it’s no doubt some of this extra money will be absorbed – but if you want things with your money to get better than they are today, you have a big opportunity to do something about it.
Ben Nash is a personal finance and investing expert commentator, financial adviser and founder of Pivot Wealth. You can follow more of Ben’s free content on Instagram | Facebook | Podcast.
Ben is also the Author of Replace your salary by Investing’ and Get Unstuck, and runs regular free online money education events, you can check out all the details and book your place here
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs.
Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
Originally published as How to be smart with the upcoming tax cuts
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