As I write this blog, weeks after State of Origin II where my QLD Maroons were dominated by the NSW Blues, I’m notified that Brisbane is heading into a three day COVID-19 lockdown. Despite enjoying 8 straight wins in a decade, a loss to the Blues still stings and the lockdown rubs some additional salt in the wounds. So, if you’re in the same boat and feeling like you need a win at the moment, let me give you a few tips on how you can get on the front foot this Financial year and dominate your financial game.
1. Use your refund to invest for your future self
If you’re getting a tax refund, it’s quite easy to let it burn a hole in your pocket and spend it straight away. Why not take that money and invest it into a managed fund or ETF that will grow over time, and let your future-self reap the benefits of compounding returns?
Conversely, you could consider investing (literally) in yourself by up-skilling in something, doing a diploma or a course that will help your career progression. If you’re working in finance, could you benefit from a Financial Modelling course? Or maybe you are a business owner that could benefit from learning Search Engine Optimisation for marketing. This could pay large dividends down the track in the form of pay rises from taking on more complex and important duties, or if you’re self-employed – additional revenue to the business.
2. Invest or Contribute 50% of your pay rises
The new financial year usually is a time for performance reviews and that means the possibility of pay rises. Often when people get a pay rise, 100% of it is added to their Cashflow and 0% is saved or invested. We usually recommend using 50% of pay rises (or rent increases) to contribute to Superannuation, or invest in managed funds, ETFs or shares. This way, you can have your cake and eat it too.
Note: If contributing to Superannuation, concessional contribution caps would have to be reviewed to ensure that you are putting in the correct amounts, and not overcontributing.
3. Salary Sacrifice or make additional contributions to Super
Salary sacrificing to Super is a great way to reduce your taxable income and turbo-charge your retirement savings. This is a pretty easy one to do, and most employers will allow you to set up a savings plan.
From 1 July 2021, you will be able to contribute $27,500 (up from $25,000) concessionally. This means that these contributions are tax deductable.
It is important to note that when calculating your available concessional cap space, that you take into consideration your Employer Super Guarantee (SG) contributions for the year. The simple formula is;
Cap Space available = $27,500 – SG Contributions
Another important change this Financial year is SG contributions will increase from the mandated 9.5% to 10% p.a.
4. Lump Sum contributions and the Unused concessional cap
I find that automation is the key to a good savings plan, but you don’t actually have to salary sacrifice in order to get money into super and get the tax deduction.
Personal lump sum contributions made after 1 July 2017 can now be claimed as a concessional contribution, but a Notice of Intent to claim a tax deduction form must be submitted.
If you want some more flexibility, you can save money throughout the year and in June make a lump sum contribution to Super. If you have the discipline, this can be a handy strategy especially if you are saving the funds in an offset account against your mortgage.
You’ve got more money saved than you have cap space?
Legislation was recently introduced that allows you to maximise any concessional cap space that you haven’t used over a rolling 5-year period starting from 2018/19 Financial Year. Note this only applied if your balance is below $500,000.
- You made concessional contributions of $15,000 in 2019/2020 Financial year. This means you have $10,000 of CC cap space unused.
- You made $15,000 Concessional contributions in 2020/2021 Financial year. This means you have another $10,000 of CC cap space unused.
- In 2021/2022 Financial year, you can add this $20,000 of unused cap space to your contribution cap of $27,500.
- Your individual Concessional Contribution Cap for 21/22 is $47,500
Note: this calculation can often be tricky and we recommend speaking to your adviser to ensure the amounts calculated are correct and you don’t over-contribute.
5. Review your Insurances
When’s the last time you reviewed your Life and TPD cover? Do you have Income Protection cover, and where are the premiums being paid from?
These are important questions that can save you big bucks.
Insurance policies are usually indexed to inflation, meaning that the sums insured increase over time and premiums move in the same direction. Sometimes this is contrary to your needs.
If you are paying down debts, which you have covered with Life and TPD cover, doesn’t that mean that you could reduce your cover at the same pace?
Yes, people have their individual reasons for keeping the full amount of cover in place. But I would say, if you’ve paid down $200,000 on your home loan over 10 years, could you not reduce your Life and TPD cover by the same amount and get some savings on your premiums?
On the other side of the spectrum, think if you have taken on any more debts or started a family, you may actually need to increase your cover.
For more information and tips on finding your ideal amount of insurance cover, head over my last blog on “How much Insurance do I Need?”
One other consideration is Income protection and how your have the ownership structured.
It’s quite common that Income Protection policies are held inside Superannuation. This is usually done because cashflow is tight, or simply there is just no other option (default cover). Two issues arise from this;
- Income protection premium payments are tax deductable if paid out of your own pocket. If your cashflow can handle the payments each month, it’s much better to do it this way and claim to full deduction yourself.
- Holding Income protection in Super can present difficulties at time of claim. As most will know, you need to meet a condition of release to withdraw money from Super. This is usually turning 60 and retiring, or becoming Totally and Permanently Disabled (TPD). Income protection can payout based on many claims ranging all the way from Sickness, to broken limbs all the way to being TPD. This is where the problem arises, where you can claim on IP but you’re not eligible to actually get the money out of Super. In some instances, it’s possible for the Income protection claim to be stuck in Super.
6. Review your Plan
Finally, and most importantly – reset and take account of your Financial goals and how they may have changed. What is still important to you? What can you be doing better in order to achieve your goals and what needs reviewing in your financial plan? Things of note to review;
- Short term, medium term and Long-term goals
- Budget and Cashflow
- Superannuation investment and contribution strategy
- Investment Plan and regular contributions
- Life Insurance and Income Protection cover amounts and structure
- Estate Plan i.e. Wills and Power of Attorney’s
I want to end this blog with a concept from the book ‘Atomic Habits’ by James Clear that I’ve started reading. In the book he emphasises that to achieve big results, you don’t have to take massive action, instead make small improvements every day. This concept is very similar to how compounding interest works with money, and it says that if you get one percent better each day for one year, you’ll end up thirty-seven times better by the time you’re done.
So, don’t think that you need to make massive changes this financial year, start small on these 6 points I’ve given and build over time.
All the best this Financial year, and I hope that you smash your goals like the Blues smashed QLD.