Put Your Own Oxygen Mask on First

With the 2020 budget being handed down last week, treasurer Josh Frydenberg is hoping that all Australians will get out and spend their tax cuts to pull our nation out of a record deficit.

The treasurer described it as “eye watering” but is it really? What does it mean to be in deficit?

Well, in simple terms, the government is spending more money than it is collecting. This is necessary during time of economic downturn as we have just experienced during Covid-19.

 

There are a couple of points to note here:

  • The Australian Government is raising this money by selling bonds – that means it has been funded by debt
  • A bond is fancy name for something very similar to loan or an IOU
  • Most of these bonds have been sold to institutional investors – local and foreign
  • These investors will be paid a regular interest payment with the principal being repaid in full at a future date.
  • These bonds have been locked in at an interest rate below 1% – wouldn’t we all love to borrow at less than 1%!
  • Unlike us, with a mortgage on our homes that needs to be paid out before we retire, there is no lifespan on the repayment of the governments loan – because Australia will never retire as it will continue to generate income through future generations.
  • Bonds allow the Australian Government to keep rolling over the debt, and with growth in the economy in years to come, the size of the debt will decrease compared to the nation’s wealth. A bit like the value of your house growing over time; the loan gets smaller compared to the value of your home.

 

So, what does this all mean for us?

Well the Australian Government want us to use these tax cuts to go out and spend to help pay that debt – we are all in this together has been the catch cry for the last 6 months hasn’t it.

But what about your family, shouldn’t you use these tax cut to pay down some of your own debts first, and then spend second?

These tax cuts are a golden opportunity to put yourself and your family in a better financial position. Reducing debt will mean that should this pandemic continue, or some other financial crisis happens to the nation or you personally ,you will be better equipped financially to deal with it.

How much can you expect these tax cuts to be:

Now let’s say you earn $100,00 and your savings in tax each year is $2,310. Instead of spending that extra money, you could:

  • Pay down your home loan; potentially cutting years off the life of your loan
  • Put it towards your retirement fund; with compounding interest, the more you invest earlier on the more ‘free money’ you receive on it
  • Use it to pay off your credit card, saving money in credit card interest each year

If you would like to know how much you can save or pay off using the savings from the upcoming budget cuts, then call us! We have access to projection software which allows us to ‘look into the future’ and we can help you put yourself in a better financial position.

Remember put your oxygen mask on first and then help others.

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