According to the Reserve Bank of Australia, the average Australian earns $1,164 per week or $60,528 per year. Then, the average Australian saves 4.70% of their income or $2,844 per annum. Not much.
You do not create wealth by saving money.
Yet, I see many people hesitant to invest in their own financial future because it ‘costs’ them money.
Are you currently doing all of the following?
1) Use a budget tracking tool: Do you use an online budget tracking tool that gets real time transactions from your credit cards, loans and bank accounts that can tell you exactly where you are spending your money? A business would fail if it did not keep track of its income and expenditure. Yet most Australian households have no discipline on how they manage their money. The waste in expenditure is an opportunity lost. To be financially savvy you don’t need to be a scrooge. You just need to know where your money is being spent and have a deliberate plan to put some of your money aside to create some real wealth. I suggest that client aim to put at least 10% of their take home pay aside to go towards an investment plan. The good budgeting tools may cost around $20 per month. Money well spent in my opinion.
2) Have a plan to pay off your home: I always recommend that any surplus cash be used to reduce your non-deductible home loan debt first. Roughly speaking, for every dollar you owe to the bank you will need to pay back two-dollars in principle and interest loan repayments. Before you have two-dollars to pay the bank back the one-dollar you owe, you will need to earn three-dollars, then pay income tax, in order to have the two-dollars to give to the bank. In summary, for every dollar you owe the bank for your home loan, you will need to earn three dollars to pay it back.
The mistake I see many people make is they think that they have to pay off their home loan first in its entirety before they can start investing. This is a wasted opportunity. You can have a strategy where you are both paying down your home loan and investing at the same time.
3) It’s ok to borrow money to buy property and shares: Saving cash alone will not make you wealthy. You may be earning 2.50% on your cash at the moment. Have you heard of inflation? Inflation is where the purchasing power of you money reduces over time. Put another way, the price of the goods and services we use increases over time. This is called inflation. The rate of inflation is currently 1.90%. That means if your cash is earning 2.50% in the bank, the first 1.90% of interest is only retaining the purchasing power of your money. Thus, you cash is only earning you 0.60% after inflation. Not much.
After you have used your cash savings to reduce your home non-deductible home loan, you may have equity in your home that can be used to help finance a loan to buy investments such as shares and investment property. These two asset classes will provide you with an income return and capital growth that is historically higher than the return on cash. The loan repayments will also then be tax deductible. Whenever you consider borrowing money to buy investment assets you need to consider if this is a sensible strategy for you given your age, income, other household expenses and how long you have left in your working career.
4) Have a plan to give extra to superannuation: In most instances, I will tell clients to prioritise paying off their non-deductible home loan ahead of making additional contributions to superannuation. Once you have paid off your home loan, that where it can make sense to start making more contributions to your superannuation fund. Superannuation is still a very attractive environment to save and invest for retirement. A couple can have up to $1.6 million each in super (Or $3.2 million combined) and pay no tax on a retirement pension that can start at around $80,000 each or $160,000 per couple. Very nice I hear you say.
5) Speak to your Accountant about a tax variation: Many Australian’s go through the financial year paying their full rate of marginal income tax. At the end of each financial year they then gather all of their receipts and tax deductions and give it to their Accountant to process. Then they may receive a little “bonus” called a tax refund. This is not a bonus! This is money that you just lent interest free to the Australia Tax Office (ATO). Speak to your Accountant about a thing called a ‘tax variation’ This is where you predict what income you will receive from both your wage and investment earnings then subtract your deductible expenses such as investment loan repayments, investment property expenses and work deductions.
The ATO will then grant a variation to the amount of tax that is debited from each of your pay checks. So you pay less tax now and have more money in your pocket for investing. If you have an investment property and your Accountant has never raised the prospect of applying for a tax variation – it is time to seek a new Accountant that is proactive and not reactive.
These are just a few core strategies I speak to clients about. Ultimately, as a Financial Planner I help clients identify which strategies they should adopt first. I can always show that my fees are recovered within the first year of working with a client. Seeking advice from a professional can be the best investment you may make.
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