How To Save And Not Spend Your Tax Cut

The recent changes to the stage three tax cuts are largely focused on trying to ease the cost of living and putting more money back in consumers’ pockets. They are  especially beneficial for middle-income earners and females in the workforce — 90% of working women are set to benefit from these changes.

This is how much the tax cuts will add up to annually:

• If you are earning $50,000, you will save $929
• If you are earning $100,000, you will save $2,178
• If you are earning $150,000, you will save $1,879
• If you are earning $200,000, you will save $4,529

Molly Benjamin, author and the founder of Ladies Finance Club, says whether you save or spend the extra money depends on your income and your goals.

If you are on a salary of $60,000, then the tax cut should put an extra $1,179 in your pocket.

“Saving that over ten years, with a 5% interest rate, would give you over $15,500 or close to $41,000 over twenty years. Not bad for an emergency fund, a nice holiday or a renovation,” she says.

For higher income earners on $130,000, for example, their $3,379 tax cut could turn into almost $45,000 over ten years, or more than $117,000 in 20 years—assuming a 5% interest rate. That could easily contribute to a home deposit, or a new car or additions to your nest egg.

Benjamin says these figures are for simply putting the money into a bank or term deposit, so it only benefits from interest payments. If you put it into investments that involve both capital growth and income —such as equities or property—then the figures could be even higher, although less predictable.

For example, if you were to invest a tax cut of $1,179 per year, assuming a 10.9% return (the average Nasdaq 100 annual return for the last 20 years) that could go up to as much as $74,832. Note: past performance doesn’t predict future performance.

That is something to consider before blowing it all on a trip to Europe, she says.

If you are in the position to save rather than spend your tax cut on essentials, here are some options for saving or investing the extra money from your tax cuts:

1. High-Interest Savings Account

Let your money chill in a high-interest savings account, where it can grow faster with minimal risk. Check out online banks for higher rates thanks to their lower overhead costs. But do remember that some of these accounts come with ongoing conditions that need to be fulfilled in order to achieve the highest rate of interest. You can read more in our guide to the best high-interest savings accounts.

2. Pay Down High-Interest Debt

Wave goodbye to those pesky high-interest debts like credit card balances, and you can save a tonne on interest payments. Benjamin suggests using the avalanche method, which focuses on paying off the highest interest rate debts first, while continuing to make minimum payments on other debt.

3. Compound Your Superannuation Account

Another option is to boost your superannuation and watch your nest egg grow over time. One of the great benefits of super is the ability for it to compound over time, allowing you to earn interest on interest. If your employer offers matching contributions, you should definitely take advantage of that deal. You can also receive generous tax treatment when adding income to your super under concessional tax rules. Head to Moneysmart’s compound interest calculator to see how much you could earn in interest off your tax cut over time.

4. Invest in the Stock Market

You could use the extra money to dip your toes into the stock market through investments in stocks or exchange-traded funds (ETFs) for potentially higher long-term returns. Benjamin suggests diversifying your investments to manage risk, and considering low-cost index funds for a balanced approach.

5. Create or Add To an Emergency Fund

Build up an emergency fund (which Benjamin calls an ‘OMG Fund’) to handle life’s unexpected expenses and avoid relying on debt. Aim to save three to six months’ worth of living expenses in a high-interest savings account that’s easy to access.

6. Invest in Skills or Education

Investing in yourself pays the best dividends. You could upgrade your skills or get new qualifications to boost your earning potential and career opportunities. Look for courses or certifications that align with your field or explore new interests that could lead to higher income.

You need to be aware that what you choose to do with your tax cut savings will come with some risk.

One type of risk is simply letting the extra money go into your bank account, and spending it without noticing on frivolous things that don’t really add anything to your life.

If you simply put it in the bank, there is a risk that inflation could run ahead of what you’re earning in interest, and therefore eat away at its spending power. If you invest the extra cash, there are the normal risks that go with whatever type of investment you choose. Part of your research should be seeking to understand those risks.

Benjamin says it’s always helpful to start by understanding your goals. “Oprah has a great saying I love: successful people get to where they want to go because they know where they are going. So, what do you want to achieve with your money?”

Are you saving for a big purchase? Is it for your long-term retirement goals? Or do you just want to have something set aside for a rainy day? Getting clear on these goals can help decide the best course of action for you.

If your shorter-term priorities are to clear your debts or get on top of daily expenses instead, then go about it mindfully. “Try to think about what’s a genuine need or what will improve your quality of life. Conversely, consider what might be a ‘sugar hit’ when you buy it but fails to bring satisfaction over time.”

Financial advice can be helpful in identifying your life goals, and then putting a plan in place to help fund them. It also depends on how much money is at stake.

Professional financial advice does come with fees (generally starting at around $5,000), so you need to be able to afford those fees, and have enough money to invest once you have a plan.

If you’re earlier in your journey, there are plenty of good resources where you can learn more about money and investing, including on platforms like Ladies Finance Club.