Make the most of the stage 3 tax cuts

Many Aussies will have noticed more money in their pay packet now that the stage 3 tax cuts are in effect. Just how much extra depends on how much they earn. Someone on a $60,000 salary, for example, will see a boost of about $98 a month, while someone paid $90,000 a year can expect roughly $161 more a month.

This might not seem like a lot of money – especially given the high cost of living – and you could easily find yourself frittering it away on everyday expenses or falling victim to lifestyle creep. But it can pay to have a plan in place to make the most of the extra cash.

We have crunched the numbers to show you the potential benefits of saving or investing any extra cash based on hypothetical scenarios for three different salary levels: $60,000, $90,000 and $120,000. The aim is to inspire you to take action and use the money to help you reach your financial goals. You might be surprised at how much even seemingly small amounts can grow over time.

Even if you pop the money under your mattress or put it in an account paying zero interest (neither of which is a great idea) you’d end up with a decent chunk of cash after 10 years. As you can see from the table below, someone on $90,000 a year who saves the extra $161 a month they earn will have saved $19,290 after 10 years.

Source: www.canstar.com.au – 23/07/2024.

Top up your savings

If you pop the money into a savings account paying a decent rate of interest, you could potentially accumulate anywhere from $15,048 to $34,194 depending on your salary.

While the majority of that will come from your own contributions the interest earned is nothing to be sneezed at, ranging from $3,258 to $7,404.

Interest earned from depositing stage 3 tax cuts into bonus saving account over 10 years

←Scroll to view →

Source: www.canstar.com.au – 23/07/2024. Interest rate of 4.67% based on bonus savings accounts on Canstar’s database, available for a deposit amount of $10,000. Calculations assume savings from stage 3 tax cuts deposited monthly and do not account for tax on interest.

Add to your home loan

With the average home loan rate sitting at 6.88%pa the potential interest savings from adding the extra money from the tax cuts to your mortgage are pretty impressive. Just take a look at the table below and you’ll see that someone earning $60,000 who adds their monthly tax savings to their $600,000 home loan could potentially save $5,104 in interest over 10 years. The savings are even better for those on $90,000 or $120,000 at $8,350 and $11,597 respectively.

Interest saved from depositing stage 3 tax cuts into home loan over 10 years

←Scroll to view →

Source: www.canstar.com.au – 23/07/2024. Interest rate of 6.88% based on owner occupier variable loans on Canstar’s database available for a loan amount of $600,000, 80% LVR and principal & interest repayments; excluding introductory and first home buyer only loans. Calculations assume savings from stage 3 tax cuts deposited monthly. Home loan calculations based on a principal of $600,000 and 30 year loan term.

Boost your super

Another option worth considering is putting the money towards your retirement nest egg. If you go down this route though it’s important to keep in mind that this will mean your money will be locked away until you’re at least 60.

Let’s look at how much the extra money could grow. As the table shows, a 35-year-old with a starting super balance of $73,585 could potentially boost their nest egg by between $16,635 and $37,800 over 10 years if they added the money from the stage 3 tax cuts to their nest egg.

Total returns from depositing stage 3 tax cuts into superannuation over 10 years

←Scroll to view →

Source: www.canstar.com.au – 23/07/2024. Net annual returns of 6.5% based on the average balanced superannuation product’s 7-year net returns on Canstar’s database, available for a 35 year old. Balanced investment options assumed to have 60-79.99% growth asset allocation. Calculations assume savings from stage 3 tax cuts deposited monthly as non-concessional contributions.

The table below shows what their super balance would look like after 10 years if they made no additional contributions compared with using the savings from the tax cuts to boost their super.

Source: www.canstar.com.au – 23/07/2024. Scenario begins at the start of the 2024-25 financial year and is based on a 35 year old with a starting balance of $73,585 (per March 2024 APRA Quartery Superannuation Industry Publication) and retiring at age 67.  SG Contribution amounts per Government announced rates, and along with the salary sacrifice and monthly after-tax amounts, are assumed to be paid into superannuation fund quarterly.  Employer contributions are assumed to be taxed at 15%.  Net investment returns assumed to be 6.5% p.a. based on the average annual 7-year return of balanced investment options available for a 35 year old on Canstar’s database (with returns effective to 31 May 2024).  Average life and TPD insurance premium of $292.48, is assumed charged at the end of each year based on default cover available for a 35 year old on Canstar’s database. Annual income, insurance premiums, salary sacrifice and extra after-tax contributions are assumed to increase with inflation each year. Inflation is assumed to be 2.5%p.a. due to the rising cost of living (CPI Inflation) plus a further 1.5%p.a. due to the rising community living standards. End balances at retirement are also rounded to the nearest $100.  Please note all information on income and superannuation performance returns are used for illustration purposes only.  Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account.  Past performance is not a reliable indicator of future performance.

Cover image source: Roman Samborskyi/Shutterstock.com