I see many people hesitant to invest in their own financial future because it ‘costs’ them money, but building wealth is the best way to invest in your future.
According to the Reserve Bank of Australia, the average Australian saves just 4.70 per cent of their income or $2,844 per annum.
Are you currently doing all of the following?
1) Use a budget tracking tool
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.
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.
2) Have a plan to pay off your home
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 per cent on your cash at the moment, but inflation will eat most of that away.
The rate of inflation is currently 1.90 per cent, so if your cash is earning 2.50 per cent in the bank, the first 1.90 per cent of interest is only retaining the purchasing power of your money.
Thus, your cash is only earning you 0.60 per cent.
After you’ve used your cash savings to reduce your home loan, you may have equity in your home that can be used to help finance a loan to buy investments.
Those investments 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.
4) Have a plan to give extra to superannuation
It’s a good idea to prioritise paying off your non-deductible home loan ahead of making additional contributions to superannuation.
Once you have paid off your home loan, that’s where it can make sense to start making more contributions to your superannuation fund.
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 you’ll gather all your receipts and give them to your accountant to process.
You’ll then receive a “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 ‘tax variation’.
This is where you predict what income you will receive, then subtract your deductible expenses.
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.