Stage three tax cuts: put yours to work for a big wealth boost

Spend, save or invest? What you do with your July 1 tax cut could have a big impact on your wealth over the long term.

People who pump their stage three tax cut straight into their mortgage could wipe two years off their loan and save $65,602 in interest, a new analysis suggests.

And if it’s a household with two typical income earners, they could increase their interest saving to $102,754, according to figures from finance marketplace Compare Club.

Even bigger benefits can come from diverting tax cuts into savings, investments or superannuation, although they can carry investment risk, it found.

Compare Club’s number crunching is based on a worker earning the national average wage of $98,000 a year receiving a tax cut of $2134 and paying down an average 25-year-mortgage of $624,000. It says a dual income household earning $170,000 and injecting tax cuts of $3608 into their home loan will shave 3.5 years off the loan life.

Compare Club’s Kate Browne says there’s an opportunity to get ahead. Picture: Supplied

“The tax cuts will provide a welcome boost to incomes, but instead of absorbing the extra money into your day-to-day spending, this is an opportunity to really get ahead financially,” said Compare Club head of research Kate Browne.

“It doesn’t seem like $177 a month can make much of a difference to anyone, but our calculations have shown the power of being deliberate with your money and the power of compound interest as well,” she said.

It’s not only borrowers who can win from planned and deliberate use of their tax cuts. Compare Club found:

• Pumping the extra cash into a savings account would accumulate $4489 over two years, assuming a 5.2 per cent interest rate, and $104,458 over the same 25-year period as the home loan.

• Investing the extra $177 each month into superannuation could add $172,496 over 25 years.

• Putting it towards an average $3076 credit card debt would repay the debt within one year and nine months, compared with 19 years and three months if making only minimum repayments. This would save $4681 in interest.

While everyone gets a tax cut from July 1, the dollar amounts are larger for higher income earners. Anyone earning above $190,000 gets $4529 while someone on Australia’s median weekly earnings of $67,600 gets a tax cut of $1369.

A separate analysis by InvestSmart has found a worker earning $70,000 and investing their tax cut into a high-growth portfolio could generate $20,687 after 10 years, while a worker earning $130,000 could generate $48,849.

Spending tax cuts wisely can help multiply your wealth. Picture: iStock

InvestSmart money specialist Effie Zahos said the average tax saving was $1888 annually or $36 a week, having a modest impact on most workers’ take-home pay.

“If you don’t have a plan in place, it’s very easy for the extra income to slip through your fingers,” Ms Zahos said.

“Ideally, every extra dollar should have a purpose. If you’re in the position to invest it’s the perfect opportunity to get started on your wealth creation journey,” she said.

Not everyone can afford to invest the tax cuts. Mr Taxman founder Adrian Raftery said many would use them simply to cover rising living costs.

“I would expect one-quarter will either save it or whack it against their mortgage, another quarter will have good intentions of doing that but for whatever reason will probably end up spending it,” Dr Raftery said.

“For another quarter, it’s just to keep their head above water, and the last quarter probably won’t even realise and will still be living from pay packet to pay packet,” he said.

Originally published as Stage three tax cuts: put yours to work for a big wealth boost