If, like many Australians, you’re looking for ways to put some cash away for a rainy day, a holiday or to earn extra income, the job has just become a bit harder. It’s also become more urgent if you are expecting a handy tax return. In early July, the Reserve Bank cut rates to 1 per cent. Soon after, the Morrison Government got its tax package passed. As a result, those on incomes from $25,000-$120,000 got an immediate tax cut of up to $1080. So, whether you are looking to make the most of your tax cut or other savings, here are some suggestions.
1. Throw it on the mortgage
For those who have a mortgage, tipping in a bit extra, especially in the early years, can save you substantial amounts. It can also shave years off the life of the loan, meaning you’ll enjoy the priceless peace of mind that comes with paying off your home sooner.
Banks charge more for the money you’ve borrowed from them than the interest they pay on money you deposit with them. So, it may not make much sense to put money in a savings account paying 1.5 per cent interest when you’re paying 3.5 per cent interest on your home loan. Say you have a $400,000 loan at 4 per cent with 20 years to run. Using ASIC’s MoneySmart mortgage calculator, by increasing your monthly payments by just $50, you could save $6146 in interest and shave seven months off the term of the loan (i).
2. Up your Super contributions
It’s hard to go past Super as a tax-effective investment option if you are happy to lock your money away until you retire.
Over the last seven years, while interest rates and inflation have been low, growth funds (where most Australians have their savings) achieved returns of 9.3 per cent a year after tax and fees, on average (ii).
You can make tax-deductible contributions of up to $25,000 a year into super. This includes your employer’s payments, salary sacrifice and any voluntary contributions you make. Once your money is in super it’s taxed at concessional rates. New rules also allow you to ‘carry forward’ unused concessional contributions from previous years. Conditions apply so call us to see if you are eligible.
Most Australians pay little attention to Super until they are approaching retirement. That means they fail to harness the power of compounding interest to the extent they could have. If you’re a decade or two away from leaving the workforce with cash to spare, it’s difficult to find a better pay-off than the one you’ll (eventually) receive from channelling savings into super.
3. Invest in shares
For longer-term savings, it’s tough to beat the returns generated by a share portfolio. Over 30 years to 2018, which included many ups and downs including the GFC, the average annual return from Australian shares was 9.8 per cent (iii). Last financial year the total return from capital gains and dividends was 11 per cent (iv).
Whether you are just starting out or wanting to expand an existing portfolio, we can help you align your investments with your goals. If you would like to direct some extra cash into shares, there are now even ‘micro-investment’ apps such as Raiz and Spaceship Voyager, which you can access via your mobile phone.
4. Put it in the bank
Australia’s current inflation rate is 1.3 per cent. If your bank is paying you less than 1.3 per cent you are losing money. If you have a so-called high interest savings account paying you a standard variable rate of between 1.5-2 per cent, you’re getting a near negligible return (v). Also be aware of high introductory rates that revert to the standard base rate once the honeymoon ends. Term deposits are currently paying around 2-2.25 per cent which is a bit better but not much (vi).
Despite these low rates, it’s wise to have some money parked in a savings account or in your mortgage offset or redraw account so that it’s available in case of an unforeseen expense. If you would like to discuss your savings and investment goals and how to achieve them, give us a call.
iii https://static.vgcontent.info/crp/intl/auw/docs/resources/2018-index-chart-brochure.pdf?20180806%7C220825 (p4)
iv ‘Year in Review’, CommSec Economic Insights, 1 July 2019