Federal budget 2020: Experts tell people to save, not spend tax cuts

Experts have revealed the things we shouldn’t spend our tax cuts on, despite what Treasurer Josh Frydenberg says.

Treasurer Josh Frydenberg has promised workers extra cash in their pay packets from this month and is encouraging Australians to go out and spend it to help kickstart the economy.

In the 2020 Budget handed down on Tuesday night, Mr Frydenberg promised tax cuts for 11 million Australian workers backdated by two years to July 2020.

The average income earner with an $80,000 salary will get $2160 cash back this year in an effort to stimulate the economy.

Anyone earning under $90,000 – the majority of Aussie workers – will get $1080 divided up in their pay this year and the other half when they lodge their tax return next year.

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The Treasurer also added cash bonuses for up to $500 for five million people on the dole.

“Australians will have more of their own money to spend on what matters to them, generating billions of dollars of economic activity and creating 50,000 new jobs,” Mr Frydenberg announced on Tuesday.

But money experts have warned many Aussies should think twice before spending the extra cash, especially when so many of us are in debt.

SPEND OR SAVE?

Finance guru Vanessa Stoykov told news.com.au rather than spending your tax cut on “gaming, alcohol, gambling, entertainment, eating out – which is what a lot of the last stimulus was spent on”, she urged Australians to save what they can.

“Spending for spending sake has got to stop,” she said. “Save your tax cuts and put it in the bank.”

The host of Secrets of the Money Masters said the main focus should be about getting rid of high-interest debt first.

“Burn the credit card. Even if it takes years, get rid of it,” she said.

When it comes to being savvy with your spending habits, she said “short-term pleasure equals long-term pain”.

Her advice is echoed by best-selling author Scott Pape, the Barefoot Investor, who has told Australians to ignore the Treasurer’s advice to spend our way out of recession in his column following the budget.

“I’m not being a ‘team Australia’ player,” the money guru wrote in a column for The Courier Mail, which he said the Treasurer would not like.

Mr Pape said with many Australians in debt and one-fifth of the population with less than $500 in the bank, the best option was to “save your tax cuts or use them to pay down high-interest rate debts”.

Money experts suggest think twice about what you’ll spend your tax cut on. Picture: iStock.

SAVE, SAVE, SAVE

“Nobody knows what’s going to happen and everyone needs a buffer. It’s security for yourself. What we’re going into, no one knows,” Ms Stoykov warned.

“I’d be selling things on Gumtree and putting it in the bank.

“You need a cushion if you don’t have savings.”

Sophie Walsh, personal finance specialist at Finder, said that while the tax cuts are “really good news for most Australians”, she reminded people that’s it’s “not wise to spend it all”.

“Most people have well less than the recommended three months savings in their bank,” Ms Walsh said. “Now is the time to be putting as much away as possible and revisit what your outgoings are, like are you paying too much for health insurance or car insurance.”

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BE SAVVY WHERE YOU SPEND

With many Australians pulling money out of their superannuation, Ms Walsh said the tax cut could also be used to top up super accounts.

“Use it to pay your mortgage, focus on paying your debts, make super contributions, or build up your savings,” Ms Walsh said.

She added that while the tax cut is a helping hand, it’s a small amount when broken down over the year. “It’s important to be aware that it will only be a slight difference in your monthly pay,” Ms Walsh said.

“A tax cut of around $2000 looks amazing but when you divide it over the year it’s a small amount.”

“Put it towards things you would be spending money on anyway, like Christmas presents and bills. Or, if you can afford to, make an extra repayment on your home loan or put it towards buying some shares,” she said.

“The Government wants us to stimulate the economy. Just make sure you’re not spending it all at once and don’t spend it all before you get it.”

First homebuyers can purchase their first home with as little as a 5% deposit with the First Home Loan Deposit Scheme.

BUYING PROPERTY

The Federal Government has also announced its extending the First Home Loan Deposit Scheme that will enable an extra 10,000 eligible first homebuyers to purchase a house with as little as a 5 per cent deposit.

Ms Stoykov said while the package is a welcome incentive for those in stable jobs, people in uncertain financial situations should be careful. “It’s good for those who can afford it,” she said.

Ms Walsh said that while the scheme will help Australians get back into the market, borrowing 95 per cent of your home is “not something to be taking lightly”.

“Keep in mind that the more you borrow the more you have to pay back,” Ms Walsh said.

“The market will likely see a slight dip in the next 12 months and it could be a really good time to get into the market and a good opportunity if you can afford to do so but keep in mind what the risks are,” she said.

While interest rates are at a record low at the moment, Ms Walsh said it’s a risk to borrow so much money especially if there was to be a rate rise in the future – which she said is eventually inevitable.

THINK LIKE AN ENTREPRENEUR

With job cuts and a changing economy, Ms Stoykov said that now is a good time to start thinking entrepreneurially, regardless of your age.

The tax cuts could go towards starting a small online business, she suggests. “I see a lot of people doing that now. That’s a good spend,” she said. “The new iPhone is not a good spend.”

Starting up a venture that could get more cash in your back pocket is how Australians should be thinking.

“I say to my kids they’ll probably have six or seven careers in their life,” she said. “It’s not just young people, though, it’s also older people who’ve lost their jobs too. Think about what else you can do.”