How to turn your tax cut into $10,000
WHEN I first started working I had this uncanny ability to spend every cent I earned. I can't recall on what, but it certainly wasn't anything significant or valuable.
Over the years, whenever my income would increase it seemed my expenses would increase at the same rate, or worse, a growing rate.
It turns out this curse, as I like to call it, has a name - lifestyle inflation.
This is where you spend more and more as your income increases to supposedly improve or increase your lifestyle.
The problem being is that this increased spending is not improving your lifestyle, and more likely is actually making things worse.
So with some much-needed tax relief on its way, there is a great opportunity to convert this extra money into something meaningful.
CONVERT TAX CUTS INTO FINANCIAL GOALS
The Federal Government last week got its long-awaited tax package passed through the parliament.
What does this mean for you?
The table below shows the savings you will make on your tax over three stages of the package that are intended to be implemented up to 2025.
Now we all know what can happen to long-dated political promises, so let's just look at what you can do with the most immediate, and therefore likely, tax relief.
The key to growing your money will be to avoid lifestyle inflation and use this extra cash to provide for your future financial self.
In a way, you can get the government to start contributing to your wealth goals, just like a form of superannuation.
CLAIMING YOUR $10,000 TAX GIFT
The majority of people are going to receive about $10 per week in tax relief in 2018-19 (which you'll be able to claim as a lump sum after you claim your 2018/2019 tax return).
Rather than saying it's only $10 and letting it fade into everyday spending, let's get that money working for you.
By setting up a plan to invest that money each week, or putting aside to invest on a regular basis, you can convert that tax saving into something that will continue to provide for you for the rest of your life.
For example, $10 per week, invested in good quality stocks and property, could grow to $10,000 in a little over 12 years at 8 per cent returns per year.
Now that may not get you overly excited right now, but think about the alternative.
If you were to do nothing with this tax relief, other than absorb it into daily life, it is very likely that in 12 years' time you will have nothing to show for what you did with that money.
I know, I've been there!
Effectively, the government is offering to help grow your wealth. All you have to do is accept the gift and get it working for you.
And, in the event that the full tax relief package is delivered over the coming seven years, there is potential to add to your investments. I know, it is a long shot, but hey, you can dream a little sometimes.
For those earning up to $100,000 there is an additional $10 per week from 2022 and another $10 per week from 2024.
What that means is your tax gift from the government would grow to more than $10,000 in less than 10 years assuming you keep putting the extra tax relief into your investments. By year 13, that money will now be worth more than $15,000.
HOW TO GET STARTED
For those who have never invested before, the first question is how to get started.
These days there are more and more products on offer, which can make it confusing, but it is also making it simpler to start.
By establishing a regular investing habit, you can put your new tax savings into property or stocks via Exchange Traded Funds or ETFs. These products give you exposure to the index of your choice, be it the Australian market, an overseas market, or a sector of the market like technology, finance or property.
ETFs provide a great way to reduce your risk in the market by giving you exposure to a range of stocks within the one product.
They also save you from having to become a stock picking guru like Warren Buffett. You don't have to worry about trying to find the next big thing - just select the market you want to participate in and let the entire market do its thing.
When you get your first pay after the tax relief package is implemented, rather than shrug your shoulders and say it is only $10, think instead that it is a gift of $10,000 or $15,000 or even more.
That is the opportunity that is being given to you. Don't be like my younger self and fritter it away. Your future financial self will thank you later.
Andrew Woodward is a mindshift.money accredited money coach based in Sydney who teaches people to take control of their money and invest for their future, simply and efficiently. Sign up for his free weekly money tips at his theinvestorsway.com.au.