Tax cut

What Should You Do With Your Tax Cut?

One of the key pillars of this year’s federal budget was the future and backdated tax cuts.  The “stage two” tax cuts originally set down for the 2022-23 year have been brought forward and backdated to July 2020.

The measures are expected to see lower and middle-income earners receive tax relief of up to $2745 for singles, and up to $5490 for dual-income families – compared to 2017/18.  The new tax scales have been released by the ATO now so all employees should be seeing an increase in their take-home pay.  You will get the kicker for the backdated portion when you lodge your 2021 tax returns.

The government wants us to spend these tax cuts to drive economic activity.  This argument that increased consumer spending will stimulate the economy is debatable as all spending isn’t equal.  Spending money on electronics made in China doesn’t benefit our economy as much as eating out at local restaurants.

On top of this Covid-19 has changed the rules of the game.  We have seen a fall in private consumption and people are still anxious about outbreaks and shutdowns.  In this environment, people will be more likely to save, not spend.

Here are my thoughts on what you should do with your tax cut.

Pay off your debt

If you’ve got debt, pay it off.  We have very high household debt-to-income ratios in Australia.  Each person will have different priorities at times like these, but if financial security is at the front of your mind then you should be reducing non-discretionary spending and non-deductible debt.

Paying off high interest finance like credit cards and car loans as quickly as you can is about the most effective investment you can make.

Invest

If you don’t have non-deductible debt, then think about your goals and look to invest the tax cuts.  Think about your goals and choose investments that are appropriate for the length of time to invest.

Younger people are particularly well served by investing early and often with compound interest on your side.

Now might be the time to sit down with a financial planner to start mapping out the years ahead.  We work with a few planners in this space so let us know if you’d like some contact details.

Don’t spend it before you get it

Don’t second guess how much your tax refund is going to be and don’t spend it before you’ve got it.  A lot gets taken into account in calculating the tax at year end and you might get caught out.

Also, avoid the Buy Now Pay Later offers such as AfterPay.  These lenders are essentially unregulated and borrowers are getting caught out.  The ASIC report this week about the schemes highlights that as many as 20% of borrowers are getting into trouble with these credit products.  Past financial results have shown that the lenders make between 10% & 20% of their income from late fees. So beware, don’t overcommit and don’t spend more than you earn.

 

Get A Grip On Your Finances

Get A Grip On Your Finances

Even If You’re Financially Secure, It’s Time To Live On A Budget!

As we start to see the loosening of the restrictions imposed due to the COVID-19 pandemic, there is still another big unknown in our lives right now: What is going to happen with the economy? Some would argue that the sharp economic recession brought on by this crisis is near the bottom of the trough and we are close to a recovery stage.  I believe we are virtually guaranteed of an ongoing recession over the next 12 to 24 months.  Particularly after the governments subsidies and stimulus packages come to an end.  What will that mean for our jobs and livelihoods—and what should we be doing financially to prepare?

Some of us are already having to rethink our spending habits to make ends meet. Others may feel more financially secure thanks to high salaries, six-month emergency funds or the ability to work remotely. But when recessions come, they tend to come for everybody—so it is time for all of us to re-evaluate our budgets and, potentially, start saving as much as we can.

Here are three pieces of advice to get you started:

Treat your income like it’s temporary

This is a good mindset to have at any time but particularly now: whatever income you are earning right now is temporary. If you are happy with your current income, don’t take it for granted—and don’t assume there will always be more money coming in.

This mindset becomes even more important during a recession. When jobs are harder to come by it’s important to treat your current income as if it might need to stretch for as long as possible. This doesn’t mean you need to cut back on all discretionary spending, but you might want to consider trimming some of your expenses so that you can put more money into savings or an emergency fund.

Saving money now is worth more than spending money later

In the face of so many unknowns, it is important to err on the side of cash.  In recessions, cash is king.  A lot of retailers have started offering significant sales and discounts to entice shoppers to start spending again—but buying something at a bargain may not be the smartest financial move.

Unfortunately, this advice will not help get the economy ticking over again, but in times of uncertainty, money in your pocket now is worth more than any saving you might make.

In other words: If you spot a great deal, remind yourself that having cash on hand is often more valuable than getting a price cut on a purchase that isn’t absolutely necessary. Saving $50 might still mean spending $100 after all—and you might really need that $100 in the not too distant future.

Make a plan and act

If you’re worried about how long your money might last during a potential recession—or if you’re simply unsure about what you should be doing with your money right now— try budgeting for 30 days, then re-evaluate.

No matter the current condition of your financial safety net. Create a budget, cut your expenses and save every dollar you can for the next 30 days, then evaluate: Did you actually trim as much as you could’ve? Did you make any purchases you regret? Were there any purchases you should have made but didn’t? How did your budget affect your overall quality of life?

Once you know the answers to these questions, you can reconsider and refresh your budget for the next 30 days. Continue to budget, reflect and repeat while saving as much money as possible—because whether you feel financially secure or financially anxious, right now it’s essential to start preparing for an uncertain future.

Don’t cut out all the things that make life bearable in these stressful times.  If you can keep something that just makes you happy, keep it.  For me, it’s chocolate and red wine.  So, if you can afford that nice bottle of red you ordered, go ahead and drink up!

Don’t hesitate to contact us if you’d like some assistance with your personal budgeting.  ASIC’s Moneysmart website also has an excellent budget planner (under Tools & Resources) as well as other useful advice.  Check out: https://moneysmart.gov.au/