Intro

Have you ever heard yourself saying, “I wish I could save more"? If so, then read on because this is your chance.

Changing tax rates

The tax rates Australians pay are changing. As of July 1^st 2024, employed Australians are going to have extra cash in their pay packet each month.

With the cost of living increases we have all faced this is going to be a welcome relief.

But if you are on top of your mortgage and your other expenses are under control, this is also a perfect opportunity to kick start your savings without having to sacrifice in other areas.

What’s happening

For all but the highest income earners, the marginal tax rates Australians currently pay are decreasing on July 1st. The upshot of this is that if you are employed and on a steady income you are going to receive an after tax pay rise.

Tax Saving examples

• A person on $65,000 will be $1,304 per year better off.
• A person on $125,000 will be $3,029 per year better off.
• A person on $185,000 will be $4,129 per year better off.
• To find out how much you will personally be better off go to this website Tax cuts for every Taxpayer.

Depending on your personal circumstances, these tax savings could be an excellent way to boost your savings. By adopting one of the three strategies outlined below, you could get closer to your long-term financial goals. And all this can be achieved without any change to your current spending habits, because you won’t miss what you never had!

The “spend to what you earn” human condition

Many people lament being broke. They tell themselves that if they were just earning a little more or got a pay rise, they would be able to meet their debts and save money.

But an all too common human condition is that people generally spend to what they earn. So, when they get a pay rise, they adjust their spending upwards and feel broke again within a couple of months.

So instead of just letting your expenses grow to absorb that extra income, let’s go through three ways you can use the tax savings to your advantage to invest into Exchange Traded Funds.

1. Simply save with Exchange Traded Funds (ETFs)

One of the simplest and most accessible ways to utilise your tax savings…especially if you are just starting out…is by using an investment platform that lets you save small amounts monthly into Exchange Traded Funds (ETFs).

Both Betashares Australia and Vanguard offer readily accessible investment platforms that let you do this. Additionally, when buying ETFs through these platforms they waive the brokerage fees.
The best way to do this would be to make use of the automatic direct debit function they offer. If you don’t have access to the extra cash in your pay packet, then you can’t spend it, so lock it away before you can!

ETFs offer a diversified portfolio of assets, making them a low-cost and efficient option for investors looking to grow their wealth over time.

By regularly contributing to an ETF portfolio, investors can harness the power of compounding returns to steadily build their wealth over the long term and save for any goals they may have - including a deposit for their first home.

2. Salary sacrifice into Superannuation

Another very efficient strategy to maximise your tax savings is salary sacrificing into superannuation.

While superannuation isn’t exciting for many of us - there is no doubt the lower tax rates available in super make it a very attractive option for long-term saving.

Instead of receiving the extra cash and paying your marginal tax rate on it, you can salary sacrifice it into your super and pay only 15% contribution tax on it. Depending on your marginal tax rate that could be a tax saving of up to 30%.

As an example, a 40-year-old on $125k who contributes their whole tax saving of $3k into superannuation and makes an annual return of 8.5% will have an extra $250k in super by the age of 65.

Not bad going. You can have an incredible end of work life holiday with that amount. Or even half of it! But like a steak knife commercial it gets better. If you sell the investments after you have started a pension, the gains are tax free.

Superannuation may not be exciting, but the tax breaks make a salary sacrifice strategy well worth considering.

3. Fund a tax-deductible investment loan for an ETF portfolio

For individuals seeking to turbo-charge their wealth-building efforts, leveraging the tax savings to fund a tax-deductible investment loan can be a very strategic move. 

By borrowing to invest into ETFs, investors can magnify their returns and accelerate their wealth accumulation - all while using income they didn’t need to come up with to fund the loan repayments. A free hit so to speak and tax deductible as well.

This strategy suits those who own a property, have equity within their home and are on top of their expenses. By using the equity in their home, investors can rejig their mortgage to fund a portfolio of ETFs and pay the monthly interest costs using their tax savings.

This allows investors to increase their exposure to the market and potentially generate higher returns, all while enjoying the tax benefits associated with investment borrowing. By harnessing the power of leverage, they can amplify their investment returns and fast-track their journey towards financial independence.

Conclusion

The upcoming income tax cuts present a golden opportunity for individuals to take proactive steps towards achieving their financial objectives.

Whether it's saving and investing with ETFs, salary sacrificing into superannuation, or leveraging investment borrowing, there are multiple avenues to make the most of these tax savings and pave the way for a brighter financial future.

As always, it's essential to consult with a qualified financial adviser to tailor these strategies to your specific circumstances and goals.

If you would like to discuss any of these strategies in relation to your particular circumstances, please contact me at [email protected].

Free Webinar with the ETF Guy and BIR Finance

Additionally, in conjunction with BIR Finance, I will be hosting a free webinar to discuss these strategies and go into greater detail on how to use your equity to fund an ETF Portfolio. The free webinars are on May 14th (morning and evening sessions available) and you can register here https://survey.zohopublic.com/zs/CZD3DH