Hey team,
Happy Monday.
Big story this week was the release of the 2023 federal budget. There is a fair bit to unpack so I won’t get into the details here. However, you can check out the Mo Money Podcast where my co-host Will, and I break down everything that you need to know about the new budget in our latest episode.
Internationally, the US is only 3 weeks away from defaulting on its debt. They have never defaulted before and it could be catastrophic to not only their citizens but also the global economy. The two partisan sides of government cannot come to an agreement or see eye-to-eye as the President, Joe Biden is a Democrat and the House of Representatives is currently being held with a Republican majority. We should note though, this has happened before and deals are always made in the 11th hour to raise their debt ceiling before the default actually occurs, so we will see what they come up with in due course.
Smart Money Upside #117
Here we unpack the numbers from a recent client we helped, what they were doing with their money when they came to see us, what they chose to do as a result of going through the financial planning process, and the financial impact and upside we helped them achieve. To chat about how to get these sorts of results, you can book an intro chat with us here.
Numbers/Background
Individual, late 20’s; household income ~ $100k; total assets ~ $50k; saving ~ $20k annually.
Frustrations
No current plan and was unsure of how to buy the property or invest, had the desire to move out of the home but was unsure whether it would be affordable.
What they wanted from us / the advice process
Clear path to purchasing a property, the commencement of a share portfolio, and is on track to financial independence.
What success looks like for them
Owning a property and investing in shares.
What money strategy they were following before we went through the planning process
Saving any surplus in the bank.
What money strategy they chose to pursue from our planning work
A clear savings strategy for a deposit for a property, introducing income targets to grow wealth at the desired rate, achieving the lifestyle goal of moving out of home and a more structured debt management strategy.
Key benefits of going through the process
Clarity on targets for property and a reality check for what financial independence will look like.
Value of advice after all advice fees year one: Cost neutral
Year 20 upside after advice fees: $1.5m
If this story resonates you can book an intro call with us here.
Video of the week
With current high mortgage interest rates every dollar of savings matters. This week we’re unpacking my favourite money hack to save money on your mortgage payments. Check out the full video here.
Client story of the week
This week we’re discussing how a recent client of ours built some passive income in a tax-effective way using investment bonds. This type of investment can help to eliminate capital gains tax and accelerate your investing and wealth building. Check out the full video here.
Podcast drop
Learn the tips, hacks, and strategies to help you level up your money game. Pods released last week:
Upcoming events:
Free online money education to help you invest smarter and create a life not limited by money:
- How to get started investing – May 17, 2023, 12pm
- Get tax smart – June 21, 2023, 12pm
- How to invest tax smart in the new financial year -July 12 , 12pm
- Plan smarter with money – Aug 16, 2023, 12pm
- How to FIRE without sacrificing your lifestyle – Sept 20, 2023, 12pm
Blog of the week: The HECS hack that will save you $1,658
If you have a HECS/HELP debt and want to get ahead, it can be hard going. But if you know how to use the rules to your advantage, there’s a hack here that can save you some serious money.
How HECS works
When you take out a HECS debt to fund higher education, you don’t need to make any payments on the debt until your income reaches a threshold – $48,361 under the current rules. Once your income increases above this level, your employer will start withholding part of your pay.
Your repayment rate depends on your income. Repayments start at 1% of your income if you earn between $48,361 – $55,836, and increase to 10% of income above $141,848 p.a.
There is no ‘interest’ charged on HECS debts, but each year the amount you owe is ‘indexed’ based on inflation to keep your debt in line with changes in the cost of living. From 2017-2021 when inflation was low, the rate of indexation averaged an ultra-low 1.52%.
During this five-year period, HECS debts increased by only 1.52% each year. This is an almost negligible increase and meant there was very little reason you’d consider making extra repayments.
But with inflation on the rise, the ‘indexation rate’ is also increasing. Last year the indexation rate jumped up to 3.9%. Based on the current sky-high inflation rate of 6.8%, it’s likely the rate of indexation applied to HECS this year will be even higher, tipped to come in around 7%.
Recent data that shows the average Australian HECS debt is $23,685, meaning a 7% indexation rate would see an average HECS increase of a whopping $1,658 in just one year.
At a 7% rate of indexation, HECS debt increases will be higher than the average interest rate on a high-interest savings account, and almost as high as the expected return on money invested into the sharemarket.
This suggests you should be looking a little more closely at whether you should be making extra HECS repayments.
How indexation is charged
Worth noting here that the way the indexation is applied to HECS is a little cheeky, and presents an opportunity.
During the financial year, your employer withholds part of your income to cover your HECS repayments. Once the financial year has ended and once you complete your tax return, the ATO runs a calculation to establish exactly how much you owe them, and at that time credits the withheld money against your debt.
This means that even though your employer is taking money out of each pay packet throughout the year, the amount you owe the ATO doesn’t actually reduce until you do your tax return – some time after 1 July.
The cheeky part in my opinion is this – the indexation of HECS debts happens each year on 1 June – before the financial year finishes and before you do your tax return. And even though your employer has been holding back your pay all year, your outstanding debt amount is still the same as at the end of the last financial year.
So here’s the opportunity…
If you make extra payments on your HECS debt before 1 June of this year, these payments are applied to the debt before the indexation rate is applied. With the indexation rate expected to be around 7%, this gives you a guaranteed return in the short term which is nothing to sneeze at.
And here’s the kicker – if you’ve had HECS repayments withheld from your pay throughout the year, and then fully repay your HECS before 1 June you’ll receive the full amount withheld from your pay back at tax time.
Once you fully pay down your HECS debt, your pay packet will get a boost moving forward because your employer will no longer need to withhold part of your pay. This means more money in your pay moving forward that you can direct to savings and investments, and/or to cushion the massive increases in the cost of living.
A bit of work to find the money to pay down your debt, but the benefits moving forward are significant.
The wrap
Trying to get ahead while paying down debt is a difficult proposition at any time, but when your debt is cranking up year on year it’s even harder.
For the last decade, the ultra low indexation of HECS debts has meant there was very little motivation for anyone to pay down this debt. But times are changing, and with the current sky high inflation, this means anyone with HECS is in the firing line on 1 June.
Getting on the front foot before your debt is indexed can save you some serious dollars today, and eliminating your HECS will pump up your savings capacity into the future – making your next money moves easier.
To your success,
Ben
PS: Pivot Wealth exists to help people invest smarter to create a life not limited by money. If you want help to make your next steps easier, you can book a 10 minute, no BS chat with us here.
Founder and Adviser
Pivot Wealth
The information in this note is not personal advice, a guaranteed pathway to that elusive beach bod, or the lost script of Edna St. Vincent Millay’s Pulitzer Prize-winning Conversation at Midnight. This is just a bulk communication pushed out into the internet, and it doesn’t even have your name on it. Your personal situation, needs & objectives, and financial situation have not been considered in putting this together – nor have we considered your dietary preferences, the way you like your hair cut, or your favourite travel destination – but we have spent a lot of time thinking about the future of urban society, whether there is other intelligent life in the solar system, and the pervasion of soy and linseed bread in Australian metropolitan hubs. You should consider the appropriateness of any general advice in relation to your own objectives, financial situation and needs and seek advice before taking any action. You should also consider using a variety of eau de toilette fragrances to keep your partner interested and colleagues on side, not using plastic straws, and minimising your screen time. Where information relates to a financial product, you should read and understand the relevant product disclosure statement. Where information relates to your own potential for awesomeness, you should consider backing yourself totally and completely. Past performance is definitely not an indicator of future performance when it comes to investments and financial products, as well as the likelihood of your children sitting still and quiet for an hour being satisfied playing with a used piece of wrapping paper. Financial services guide.