How next month’s tax cut could save you $66,000

Spending, saving or investing? What you do with your July 1 tax cut can have a big impact on your wealth in the long run.

Judo Bank Economic Advisor Warren Hogan says the Fair Work Commission’s decision to increase the minimum wage by 3.75 percent is “consistent” with inflation falling “below three percent”. Fair Work Commission chairman Adam Hatcher announced the decision on Monday morning. The change will take effect from July 1. “Really, what they’re saying is we’re going to make sure you keep up with inflation even though you get some pretty decent tax cuts,” Mr. Hogan said. Sky News Australia. “It’s this balance between what you might say is a humanitarian approach versus not putting more inflationary pressure on the economy than is necessary. “They believe this is consistent with inflation falling below three percent.”

And if it’s a household with two typical income earners, they can increase their interest savings to $102,754, according to figures from financial marketplace Compare Club.

Even bigger benefits could come from diverting tax cuts to savings, investments or retirement, even though these can come with investment risks, it found.

Compare Club’s figures are based on a worker earning the national average wage of $98,000 per year, receiving a $2,134 tax cut and paying off an average 25-year mortgage of $624,000. It says a dual-income household earning $170,000 injecting tax cuts of $3,608 into their home loan will reduce the loan term by 3.5 years.

Kate Browne of Compare Club says there is an opportunity to move forward. Image: supplied

“The tax cuts will provide a welcome boost to incomes, but rather than soaking up the extra cash in your everyday expenses, this is an opportunity to really get ahead financially,” says Kate Browne, head of research at Compare Club.

“It doesn’t seem like $177 a month can make a big difference to anyone, but our calculations have shown the power of being mindful of your money and also the power of compound interest,” she said.

It’s not just borrowers who can benefit from planned and deliberate use of their tax cuts. Compare Club found:

• Pumping the extra money into a savings account would accumulate $4,489 over two years, assuming a 5.2 percent interest rate, and $104,458 over the same 25-year period as the home loan.

• Investing the extra $177 per month in retirement could add $172,496 over 25 years.

• If we put it down to an average credit card debt of $3,076, the debt would be paid off in one year and nine months, compared to 19 years and three months if only minimal payments were made. This would save $4,681 in interest.

Although everyone will get a tax cut starting July 1, the dollar amounts are larger for higher incomes. Anyone earning more than $190,000 will get $4529, while someone with Australia’s average weekly income of $67,600 will get a tax cut of $1369.

A separate analysis from InvestSmart found that a worker earning $70,000 who invests the tax break in a high-growth portfolio could generate $20,687 after ten years, while a worker earning $130,000 could generate $48,849.

Spending tax cuts wisely can help you grow your wealth. Image: iStock

InvestSmart money specialist Effie Zahos said the average tax savings was $1,888 per year or $36 per week, which has a modest impact on most employees’ take-home pay.

“If you don’t have a plan, it’s very easy for the extra income to slip through your fingers,” Ms. Zahos said.

“Ideally, every additional dollar should have a purpose. If you are in a position to invest, this is the perfect opportunity to start your wealth creation journey,” she said.

Not everyone can afford to invest in the tax cuts. Taxman founder Adrian Raftery said many would simply use them to cover the rising cost of living.

“I would expect a quarter to save the money or deduct it from their mortgage. Another quarter will have good intentions to do so, but will probably end up spending it for whatever reason,” Dr Raftery said.

“Another quarter is just trying to stay afloat, and the last quarter will probably not even realize it and still be living from pay packet to pay packet,” he said.