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Thursday, July 12, 2012

Tax cuts and what to do with them

I heard a comment on the radio this morning about the new tax cuts for this financial year.   You may already know that in Australia this financial year, the tax-free threshold has tripled.  It was $6000 but now individuals can earn up to $18200 before having to pay any income tax. The other rates have been adjusted accordingly so that a person earning $80000 or more is taxed similarly to last year.  Everybody else gets a tax cut.  We also have money coming to us in the form of the Household Assistance Package and some people are also eligible for the Schoolkids Bonus.  The radio program also mentioned a decrease in petrol prices and interest rates.  All of this adds up to more disposable income for low-to-middle income earners.

I love that word "disposable", don't you?  It implies that we have money to literally "throw away".  And as much as we would disagree that this is the case, chances are, most of us will effectively do that - throw our money away - if we are not careful.  You see, without a working budget, the average person gets their wages, pays their bills and spends whatever is left over.  The fact that there is an extra amount (whether that be $5 or $50) doesn't change their spending habits.  People do not tend to purchase the same things they did before a payrise and then have the exact extra amount left over at the end of the week or month. "But what is it spent on?" I hear you ask.  Perhaps a small treat for getting the payrise, perhaps an unexpected expense such as new brakes on top of the car service.  Perhaps a new toy for the kids or something that you should have been saving for but have decided to charge to the credit card instead.  You wouldn't be able to trace the amount because your expenses vary each week anyway.  There is no conscious decision to spend $37 on something if you know you have an extra $37 in your pay packet.  In fact, the radio program I was listening to mentioned in increase in "Consumer Confidence" which sparked a debate about how this would have been measured.  They speculated that it might mean that people are spending more.  Wether this is the measurement or not, it is likely true that people are spending more money, since they evidently have more to spend.

So what can we do?  Well, it has been proven time and again that if you put money aside to save before the bills get paid and you follow your existing spending habits, then that money doesn't get spent with the rest.  I would suggest that we compare our wages and benefits and our estimated tax with previous  years and put some or all of the extra amount either into your savings or to pay off your debts.  Do this at the beginning of your pay cycle not at the end.  That way we'll be further along the road to financial freedom.  If you don't already have a savings plan in place then have a look at my post on  Saving 101 and Separate Bank Accounts to get some ideas on how to set one up.

Enjoy your extra "disposable" income.  Try not to throw it away.  But if you do, make sure it's a conscious decision and have fun with it.

2 comments:

  1. I believe the tax free threshold increase is to be spread out over three years? That is, it won't be $18,200 for financial year 2012/13?

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  2. Thanks Mark, I like it when people keep me in check.
    I've looked up the ATO website and it clearly states the rates for the 2012/13 year have the full $18200 tax free.
    Here's the link http://www.ato.gov.au/businesses/content.aspx?doc=/content/12333.htm&mnu=43165&mfp=001/003 or just go www.ato.gov.au and type in a search for tax rates. There's a menu down the left side. Got to "find rate or calculator"," income tax" then "individual rates" and you get to the table.

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