Budget for Success

Keen to save more and make a big dent in your mortgage?

By budgeting better, you can reach your goals sooner. Here is a guide to get your New Year started in the right direction.

1. Record your expenses

Carry a notebook around with you for a month and write down everything that you spend money on and the amount. Don’t forget daily coffees, magazines, eating out, etc. Record it all.

This will show you how much you’re spending and may prompt you to realise how much you spend on non-essential items.

2. Calculate your income and expenses

Calculate how much income you make after tax every month and write this figure down. There are a number of good budgeting tools available on the internet to help you easily track your expenses. If you can’t find one, just use a notepad.

Divide your expenses into those that are essential (for example, groceries, bills and transport costs) and those that are non essential (for example takeaway food, entertainment and indulgent purchases) and calculate how much these cost you each month. For example, if your quarterly electricity bill is usually $450, you will need to divide this figure by three to get monthly cost of $150.

When this is done, subtract your expenses from your monthly income. This will show you whether you are spending beyond your means or whether you have some cash to spare.

3. Change your spending habits

To free up some cash to make extra repayments on your home loan or achieve or financial goals, you will need to scrutinise how much you are spending and work towards reducing this amount.

The non-essential expenses column is the first place to start cutting back, If you are spending a lot on takeaway food, start eating at home more often and pack your lunch to take to work.

If your petrol costs are high, consider taking public transport or walking if possible. Perhaps you could invest in a bicycle so you save money and gain a health benefit at the same time.

4. Stick to your budget

Once you have allocated a budget to each of your expenses, stick to it. If you have budgeted to spend $60 a month on eating out, make sure you don’t spend any more.

It will take discipline, but by following your budget you could cut thousands of dollars interest off your loan and pay your mortgage off much sooner.

Savings Tips

Here are some savings tips to help you on your way:

• Have an easy access cash account for everyday needs with a debit card attached
• Save a fixed amount of money every pay in a separate account
• Save your pay rises, bonuses or special payments or tax refund
• Put your change into a savings jar at the end of each day
• Pay your mortgage fortnightly and pay an extra 5-10 per cent on your mortgage every month
• Budget a specific amount for leisure, mortgage repayments and personal expenses
• Make extra superannuation contributions from your pre-tax salary otherwise known as salary sacrificing.

Do you need to update your salary sacrifice arrangement?

Salary sacrifice not only boosts your super balance, but it can also reduce your accessable income and therefore, the income tax you pay. By salary sacrificing, you may be able to reduce the total tax you pay and increase your super contributions without impacting your take home pay.

It is important each year that you reassess your salary sacrifice arrangements to ensure you are getting the best benefits available.

Differing circumstances may affect how much you can salary sacrifice. For example, if you have had a pay increase in the last 12 months, it may be beneficial to increase your salary sacrifice contribution, which in turn will minimise your payable income tax.

However, please be aware that the government has now reduced the before-tax contribution limit and if you breach the cap applicable to your age, you may be liable for excess tax.

The annual individual limit on before-tax contributions known as concessional contributions (eg. employer Super guarantee or salary sacrifice) is $25,000. However, if you turn 50 at any time between 1 July 2007 and 30 June 2012, you will be able to contribute up to $50,000 (not indexed) of before-tax money from the financial year you turn 50, until 30 June 2012. After this date, the limit will be $35,000 for everyone.

For the self-employed, this cap applies to personal contributions you make for which you claim a tax deduction.

Over the years, salary sacrifice has proven to be one of the most popular and effective wealth accumulation strategies available in Australia. Conditions do apply and we recommend you discuss this strategy with your financial planner to see if this is suitable for you.

For more information about salary sacrifice, call 1300 55 10 45 or email info@intellichoice.com.au. Alternatively, visit www.intellichoice.com.au for more details.

Strategies to reduce your tax

The two certainties in life are death and taxes.

We do not have a crystal ball to allow us to see when we are going to die, however we do know when our tax is due. The end of the financial year is 30 June 2010. Unlike death when sometimes you are not prepared, you can prepare yourself for the tax man.

In the 2006–07 income year, individuals had $18.8 billion refunded or otherwise paid out after they lodged their income tax return, and $13.5 billion was required to be paid by other individuals to meet their annual tax liabilities.

Were you one of those individuals who contributed $13.5 billion to the federal government because you were not prepared? Or were you someone who felt you should have received a better or bigger tax refund?

What can you do?

1. Determine now, your anticipated earnings for this financial year – wages, commission, bonus, sale of goods or services.
2. Complete an estimate of your tax liability – understand how much you are going to pay.
3. Assess your long term goals and determine if you are happy to continue contributing to the Australian Taxation Office or would you be better off contributing to your own long term investments. In other words have the tax man pay off your debts.
4. Contact a financial advisor to assist in developing a long term strategy to reduce your tax liability and more importantly to help you create wealth.

Examples of some products that can help you reduce tax and at the same time build wealth include:

• Property investment – tax deductible items include interest on borrowings, council rates, body corporate fees, maintenance, management expenses and depreciation.
• Shares – tax deductible items include interest on borrowings and franking credits
• Managed Funds – tax deductible items include interest on borrowings, deferred income and franking credits.
• Superannuation – salary sacrifice, salary packaging and tax deductions available for self-employed individuals.

For more information about ways to reduce your tax payable, or to book an obligation free appointment with one of our qualified financial planners, call +61 7 3624 1900.

A guide to salary sacrificing

Salary sacrificing some of your pay to superannuation can be a very tax-effective way to increase your reitrement savings and also reduce your income tax liability. The amount you sacrifice into your super is essentially deducted from your assessable income, which may reduce your income tax liability.

Instead of paying tax at your marginal rate on the money, when you salary sacrifice your pay to super, it becomes a taxable contribution received by the fund. The contribution (plus any future income earned from the investment) is generally taxed at a minimum rate of 15%.

Because of the generous tax concessions, the government restricts concessional contributions (which include superannuation guarantee, salary sacrifice and personal concessional contributions).

An employer can contribute to super on your behalf and claim a tax deduction for an unlimited amount, but if your concessional contributions exceed $50,000 in a year, you'll pay tax at 31.5% (in addition to the 15% tax paid by the super fund) on the excess. You'll receive the tax bill but you'll be allowed to withdraw money from you super fund to pay it.

If you're 50 or older at any time to 30 June 2012, your concessional contribution limit is $100,000 (instead of $50,000) beore excess tax is charged. The $100,000 limit applies for each year you're over 50 until 30 June 2012,w hen it reverts back to $50,000.

Things you should consider
Don't salary sacrifice funds you think you may need before you retire. If you're younger, it may be more beneficial to pay off non-deductible debt (such as your home loan) instead.

If you're older, the reverse could be true. Generally, salary sacrificed funds will have been taxed at 15% and once you retire you can access the funds tax-free and pay off oustanding debts. Make sure you have a written agreement with your employer before making contributions.

If you would like more information about salary sacrifice or whether this is the best option for you to have a financially secure future, speak to one of the financial advisors at Intellichoice first. They will be able to recommend an option that suits your needs based on your current financial circumstances. Speak to one of the financial planners at Intellichoice by calling 1300 55 10 45 email info@intellichoice.com.au or visit www.intellichoice.com.au for more details on the various services and products on offer.