7 money myths that might be costing you

We set the record straight on common misconceptions that could be leaving you out of pocket.

Myth 1: You need lots of money to invest

Myth busted: You can start investing with as little as $5.

What may be surprising about investing is how little money you need to get started. It takes just $500 to invest in shares and exchange-traded funds (ETFs), but you can become an investor for a fraction of that.

Micro-investing apps such as Raiz and FirstStep round up the loose change on purchases and invest the money across a variety of readymade portfolios made up of ETFs, or you can grow your portfolio with regular deposits. With a Raiz account, you’ll need to accumulate $5 before the money is invested.

If you have more than a fiver to spare, CommSec Pocket lets you invest in seven themed portfolios – also comprised of ETFs, with as little as $50.

Sure, these small sums won’t see Warren Buffett losing sleep. But micro-investing can be a stepping stone to bigger things as you gain confidence by investing.

→ Related: CommSec Pocket v Raiz Invest: How they compare

Myth 2: Giving up a takeaway coffee and smashed avo will make you rich

Myth busted: Take a look at other areas of spending – the wastage can be draining your finances.

The humble avo-on-toast has seen its reputation smashed by a number of commentators who claim spending on this healthy snack is holding Millennials back financially. Is it as simple as that? Not really.

To put things in perspective, let’s assume café-quality avo on toast with a latte on the side will set you back $20. It’s not something most of us indulge in daily, so allowing for one avo-fuelled Saturday brunch weekly, we’re talking an annual spend of $1,040.

The thing is, there are plenty of other areas where we literally toss money away. Food wastage sees Australian households throw out the equivalent of one in five bags of groceries each week. We each drink an average of 30 litres of bottled water annually, yet the same amount of tap water costs about 30 cents. And research by Heritage Bank found Australians could collectively save $7.4 billion each year simply by shopping around for a better deal on financial products.

Long story short, take a closer look at your spending habits, bank accounts and major bills. It’s a fair bet you’ll find savings that eclipse the small bite avo on toast takes out of your budget. Go ahead, enjoy the brunch.

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Myth 3: Redraw and offset are the same thing

Myth busted: There’s a big difference between parking money inside your home loan rather than alongside it.

Redraw is a common feature of variable rate home loans, letting you withdraw additional payments if you need the cash.

By contrast, an offset account is a separate at-call cash account linked to your home loan. The balance of the offset is deducted from the balance of the loan, with interest calculated on the difference. This lowers the interest component of each repayment, meaning more goes towards paying off the loan, helping you become mortgage-free sooner.

Both options – extra payments (backed by redraw) and an offset account – can provide valuable savings on interest. However, redraw can come with a few catches. You’re likely to face limits on withdrawals plus possible fees to access your money. St George Bank, for instance, can charge up to $50 for a redraw. Pulling funds out of an offset account generally costs nothing, with zero limits on withdrawals.

Lenders can also tweak the rules around redraw. In May 2020, the Commonwealth Bank lowered home loan repayments to the minimum meaning customers had to actively let the bank know if they wanted to pay more. That same month, ME Bank dramatically cut the amount some customers could redraw from their loans – a step it hastily reversed after significant backlash.

In the past, offset loans have come with higher rates. These days, some of the lowest rate home loans on the Canstar database feature an offset account. The key is to be disciplined about keeping a reasonable balance in the offset account to maximise the savings on loan interest.

→ Related: 6 things you need to know about redraw and offset

Myth 4: There’s no point salary sacrificing into super if you don’t earn a high income

Myth busted: Even lower-income earners can benefit from the tax savings.

Salary sacrificing means having part of your before-tax wage or salary paid into super rather than taking the money as cash in hand. These pre-tax contributions are taxed at 15%, so to get the full benefit of tax savings, your personal tax rate needs to be above 15%. Happily, that’s the case for most workers.

The median employee income in Australia is $50,861, according to the Australian Bureau of Statistics. This attracts a marginal tax rate of 32.5% – 17.5% higher than the 15% tax on salary sacrificed super contributions. Making a salary sacrifice contribution of $5,000 to your super annually would mean a tax saving of around $875, compared to making the same contribution out of your own pocket. Put simply, more of your money goes into growing your retirement nest egg rather than being handed over to the Tax Office.

Even on a salary of $25,000 (tax rate of 19%), salary sacrificing $1,000 into super can still produce a tax benefit of $40.

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Myth 5: It’s worth buying a work vehicle because you can claim it all back on tax

Myth busted: Chances are you’ll only be able to claim some of your car costs on tax – and strict rules apply.

Driving to and from work doesn’t make your car eligible for tax deductions. As far as the tax man is concerned that’s ‘private use’, and this still applies even if you run occasional errands like picking up office mail on the way to work.

If you use your car as part of your job, for example driving to various work sites or visiting customers, you may be able to claim some car costs on tax – as long as you’re not reimbursed by your employer.

One option is to claim 72 cents per work-related kilometre – to a maximum of 5,000 kilometres – which works out to $3,600 annually. Alternatively, you’ll need to keep a logbook for 12 weeks to tally the percentage of work-related mileage. This percentage is then applied to all your car costs including depreciation, to come up with the total amount you can claim each year. You’ll need receipts for all the expenses you plan to claim.

Long story short, buying a car in the belief that the Tax Office will foot the bill is likely to lead to disappointment. If in doubt, speak with your tax adviser.

And if you have a small business you might be thinking that you’ll be able to claim it all back thanks to the instant tax write-off but that’s not necessarily the case. A car limit applies to the cost of passenger vehicles. For the 2020-2021 financial year cars can be written off up to the $59,136 limit (excluding GST) but anything over that cost cannot be depreciated at all. 

It’s also worth noting that if you purchase a car for your business, the instant asset write-off is limited to the business portion of the car limit, warned Dr Adrian Raftery, also known as Mr Taxman. “If you hardly use the new car for business then the claim reduces even greater,” pointed out Dr Raftery.

→ Related: Visit Canstar’s Tax Hub

Myth 6: Property is safer than investing in shares

Myth busted: The property market is not immune to serious falls, and investors are more likely to wear a loss than homeowners.

Safe as houses, right? Maybe not. Like all growth assets, the residential property market moves in cycles. As recently as 2018, home values in Sydney and Melbourne plunged 9% and 7% respectively, according to CoreLogic’s Hedonic Home Value Index, December 2018.

Regardless of market conditions, not everyone makes money on property. CoreLogic’s latest Pain and Gain report showed that in the December quarter of 2020, one in 10 properties resold nationally failed to deliver a profit.

The same report found investors are more likely to wear a loss than owner-occupiers. One factor behind this is the holding time needed to make money. Those who incurred a loss held their property for less than seven years. Sellers who pocketed a profit had owned the property for more than nine years.

The moral of the story is that time in the market can be as much a factor in success with property as it is with shares.

Myth 7: I’m too young to worry about my super

Myth busted: Super is your money. That makes it worth taking care of at any age.

In our 20s, super can seem irrelevant. Retirement is a lifetime away, and plenty of other goals can seem more pressing such as investing in your education, taking a gap year or saving for a first home.

That’s not a cue to disregard super altogether. Industry body ASFA says the average super savings for a 20-24-year-old, range from $9,481 for males to $8,051 for females. That’s real money, and with the benefit of compounding, even a $8,000 super balance could grow to $236,857 over a 40-year working life, according to MoneySmart’s compound interest calculator.

Fortunately, taking care of your super at a cash-strapped young age doesn’t have to mean making extra contributions. Choose the fund that’s right for you, take it with you when you change jobs, and let each employer know the account details of the fund you’d like their contributions paid into. Your future self will thank you for it.

→ Related: How much super should I have at my age?

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