Hey,
Happy Monday.
Before we get into it for this week, I’m PUMPED to share that we’ve just dropped our next online event series, you can check out all the details and register here:
- Buy property smarter in 2023 – February 22, 2023, 12pm
- Build a second income investing in 2023 – March 8, 2023, 12pm
- Invest with property equity in 2023 – March 22, 2023, 12pm
- How to create generational wealth – March 30, 2023, 12pm
- Financing 101 – April 5, 2023, 12pm
- How to save more money faster – April 19, 2023, 12pm
- How to adult with money – May 3, 2023, 12pm
- How to get started investing – May 17, 2023, 12pm
- Get tax smart – June 21, 2023, 12pm
US inflation has slowed again for the seventh consecutive month down to 6.4%. However, this is still a higher rate of inflation than what was anticipated and the markets reacted to this throughout the week.
Australia’s unemployment rate has risen as well. Economists had expected the Australian Bureau of Statistics to report the unemployment rate at 3.5% with about 20,000 jobs added, however, unemployment is now at 3.7%. Treasurer, Jim Chalmers stated, “We expect unemployment to tick up a little bit but we need to remember that unemployment is still near historic lows.”
The jobless rate is now at its highest level since last May’s 3.9% though – when the first of nine interest rate rises occurred.
Smart Money upside #105
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
Couple, late 40’s; household income ~ $450k; total assets ~ $1.7m; saving ~ $60k annually.
Frustrations
Not having clarity and not knowing what the next step should be.
What they wanted from us / the advice process
Better structure, a clear path forward and how best to utilise any surplus cash.
What success looks like for them
Having more passive income, maintaining their current lifestyle, having the choice to reduce work, being debt free and being prepared for retirement.
What money strategy they were following before we went through the planning process
Saving cash in the bank.
What money strategy they chose to pursue from our planning work
Purchase an investment property as well as a strategy to simultaneously pay down debts & build shares.
Key benefits of going through the process
Improved accountability and clarity moving forward on what their next step is as well as what retirement may look like for them.
Value of advice after all advice fees year one: $32k
Year 20 upside after advice fees: $3m
If this story resonates you can book an intro call with us here.
Video of the week
In this week’s video, I discuss how to calculate the ideal amount of cash savings to hold in your emergency fund to protect you from investment and lifestyle risk. 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:
Blog of the week: How Emma and Andrew saved over $8k in tax
In Australia, we pay a lot of tax, and every dollar of tax you save is an extra dollar you can invest to get ahead faster or spend to enjoy your lifestyle a little more.
But the tax rules are complicated and can be confusing, and it’s easy to end up overwhelmed. Being smart and strategic with your tax can then end up in the too-hard basket, and you can end up leaving a heap of money on the table.
This happened to a couple I recently worked with, but they turned things around and used the rules to their advantage to fast-track their progress towards buying their dream home.
Emma and Andrew (names changed to protect the awesome) were ex-pats in their early 30’s earning solid incomes. They were saving strongly at $3k per month but really wanted to buy their dream home which didn’t seem possible without a crippling mortgage.
When we started working together they called out the fact they knew they wanted to save tax, but they had no idea how to do it.
We spent some time together diving into what they were doing and realised they were missing a trick.
When we went through the money decision making and planning process they realised that with a couple of small tweaks they could hold onto more of their income, reduce their annual ATO donation, and use that money to fast track their wealth building and buy their dream home sooner.
The results?
They saved over $8k in tax through the next twelve months alone, adding extra money to their bottom line to further grow their investments and get ahead.
In her 20’s, Emma had opened up an investment account that she was using to do a fairly small amount of investing. The account seemed to work pretty well and her investments slowly grew. She wasn’t investing a lot so the growth wasn’t huge, but she was happy with how it was working.
Years later when it came time to get more serious about her investing so her and Andrew could build the deposit for their dream home, Emma had the account ready to go. Given work was going through a busy period at the time, she had a lot on her plate and decided she’d go ahead and use this account for their investing moving forward.
Over time the investment account built up to a really solid $445,000, which based on the long term sharemarket return of 9.8% was generating an annual return of around $43,610. But this income was taxable, which based on Emma’s marginal tax rate of 47%, meant tax on this income of around $20,500 each year.
This still left them with $23,110 in after tax returns each year, so while they knew they were paying a chunk of tax, they were pretty happy with the outcome.
But they both didn’t realise the results could be so much better…
Who owns your investments is important
This is an important consideration for any investor, but in particular in couples and families, getting this right can either save or cost you a bunch of tax.
Investment income is taxable
When you own investments in your personal name, all income earned through dividends and capital gains adds onto your personal ATO assessable income, then taxed at your marginal tax rate.
Because of the difference in marginal tax rates within couples and family units, the implication is that having the same investments owned by different people can lead to different tax outcomes, and a different after tax investment return.
Tax rates are different throughout family units
I’ve included an example below showing the tax rates available for an example family and the different tax structures and tax rates they could use to invest.
You can see from the above, that the difference between paying tax at the highest rate (and therefore the potential tax saving) across these groups compared to the lowest is $4,700, which is money you could use to grow your investments faster.
Your after-tax return is all that matters
If your aim is to seriously invest and build a solid second income from investments, over time you will build a substantial income stream from investments. Your investment returns are all important, and the higher your investment return the faster you’ll get ahead.
But you should know the only investment return that really matters is yours after-tax return. This is how much you have leftover after your ATO donation, which is the amount of money your investments will generate either for you to spend on your living expenses, or reinvest to continue growing your investments and wealth.
It’s easy and common to focus on the headline return on your investments. While this return is important, it’s not as important as your after-tax return.
For Emma and Andrew, they had fallen into a common trap that was leading to their after-tax investment return is much lower than it could have been.
It’s common in couples for one person to be more interested in investing, more confident around taking action, and for that person to end up being the ‘driver’ of investing within a couple. For these guys, Emma was that person.
The issue with this is that Emma had a higher income than Andrew ($200k vs $60k), so was paying tax at the top marginal tax rate of 47% compared to Andrew’s marginal tax rate of 34.5%. This meant more tax being paid on investments owned in Emma’s name than if the same investments were owned by Andrew.
As a result, as their investments grew, the extra unnecessary tax they were paying also grew.
You can change things
For Emma and Andrew, after going through the process of understanding their options and what was actually possible, they realised that by moving their investments to Andrew’s name, they’d save thousands of dollars in tax – every single year.
Moving investments can have tax consequences
You should be aware that any time you sell investments, you have to pay tax on any increase in the value of your investments (gains) made. This means it can actually cost you a lot of tax to sell down investments and move them to your partner..
Fortunately for Emma and Andrew, with the recent share market disruption their investments didn’t have any large gains attached to them – meaning they were able to move their investments without paying a bunch of extra tax.
As a result, on the annual investment income of $43,610, Andrew only had to pay a tax of $15,045 compared to Emma’s tax bill of $23,110, resulting in an annual tax saving of over $8k every single year.
The lesson here is that understanding the tax rules before you invest is always better, so you can make sure things are structured in the best way from the start and avoid paying unnecessary taxes in the future.
The wrap
Through the tactics we put in place, Emma and Andrew were able to save a heap of tax and create a pathway to buying their dream home without a crippling mortgage. They used the rules to their advantage to get their money working smarter, not harder.
But the rules can be complicated and confusing, and for busy people with busy lives it’s easy to make your money and investing moves without really understanding how they will play out into the future.
But getting this right can come with some serious upside, so it’s worth taking the time to make not only good choices, but the best choices for you.
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.