Financial News Articles

Navigating the high cost of living in Australia

In this article we look at some of the ways you can better manage the high cost of living by investing, increasing your income or reducing expenses.

Key takeaways

• Investing a portion of your income is one way you can keep up with a high cost of living.
• Shopping around for the best deals on your home loan, electricity and insurance, can end up saving you hundreds of dollars over the long-term.
• You can find an extra source of income outside of your 9-to-5 job by earning passive income or renting out your garage space, for example.

With the bare essentials becoming – well, expensive, it’s not surprising that many people are looking for new ways to save money or increase their income.

The good news is there are steps you can take to manage a higher cost of living and stay on top of your bills.

Managing a higher cost of living

Here are three ways that could help you better manage a higher cost of living.

#1 Continue investing

Investing a portion of your income is one way you can keep up with, or even outpace, a higher cost of living.

While changes to interest rates or sharemarkets may cause many people to second guess themselves when making investment decisions, it’s important to stay focused on your long-term goals and avoid being influenced by short-term market volatility.

Having a diversified investment plan – money invested across many asset classes and in many industries – will help to cushion you from major sharemarket falls.

If you're new to investing, it’s a good idea to consult with a financial adviser who can provide guidance based on your circumstances and specific goals. Regularly review your investment portfolio to ensure it remains on track and make adjustments as needed.

#2 Find ways to reduce expenses

Reducing your expenses doesn't mean sacrificing quality of life. It involves making intentional choices, such as cooking at home or exploring cost effective leisure activities. Small changes can significantly impact your overall financial health.

Shopping around for the best deals on your home loan, electricity and insurance, can end up saving you hundreds of dollars over the long-term. You may also want to consider cutting down on subscriptions or memberships you don’t use, and make sure you’re getting all the concessions you’re entitled to such as rebates or pensioner discounts.

Home loans

One of the simplest ways to reduce mortgage debt beyond paying more than the minimum repayment, is to review your home loan.

Many mortgage lenders are competing for new business so it’s worth checking if your interest rate and features are still competitive. Switching to another mortgage lender may get you a better rate – helping you to pay off your mortgage faster.

Insurance

Regularly assess your insurance policies to ensure you’re adequately covered without overpaying. Bundling policies or shopping around for better rates can lead to substantial savings.

Electricity

Consider using some of these energy saving tips:

• Check out government and council rebates to reduce your energy bill
• Switch to energy efficient lightbulbs
• Consider installing solar panels: while costly initially, this can save thousands of dollars over the long-term
• Water savings: install a water efficient showerhead and only run the dishwasher on a full load
• Only heat and cool the rooms you’re using and use a timer
• Unplug unused electronics
• Hang-dry your laundry rather than using a dryer.

Groceries

While food might be a necessary expense, there are ways to save without compromising quality. 

Meal planning is a simple way to get better at grocery shopping to reduce wasting food. You could also consider finding recipes that use the same ingredients as you’re more likely to use up an entire bag of vegetables or a fresh bunch of coriander.

Alternatively, consider growing your own vegetables.

#3 Increase your income

Although there isn’t always a quick or easy way to increase your income, there are options for earning extra cash to cover more immediate expenses.

You can find an extra source of income outside of your 9-to-5 job by:

• renting out a room or parking space
• pet sitting
• dog walking
• online tutoring
• or explore a side hustle such as market research. 

You may also want to consider investigating avenues for earning passive income to earn money without actively working. This could include investments in shares, real estate or starting an online business. While building passive income takes time, it can become a valuable asset in beating the high cost of living.

Lastly, while it may not be easy to increase your pay overnight, you could consider ways to use your job performance to get a salary increase if you can prove you’ve gone above and beyond.

Keep an eye on the job market and be open to exploring new opportunities. Sometimes, switching jobs can result in a substantial salary increase. And always invest in your skills and education to make yourself more marketable. 

Summary

The high cost of living in Australia may seem daunting, but with strategic planning and informed decision making, it's possible to achieve financial stability. Remember, it's not about how much you make but how well you manage what you have.

Source: MLC

 

Getting your insurance cover right

Let's run through some things to keep in mind to decide what level and type of cover you need.

Finding your insurance sweet spot

It can take days – and a whole lot of stress – to figure out what type of insurance cover is best for you and how much of it you need. And the thought of making a decision that could have a major impact on your life down the track can feel daunting. The good news is, we’ve got some great pointers for you. 

The ‘what does your gut tell you' test: sleeping easy at night

Numbers certainly have their place in calculating the right level of insurance cover – but it’s also about how much of a safety net you’re willing to pay for and what cover is going to help you sleep well at night. Thinking about these questions – and whether you’re likely to lose sleep over the answers – can be a good starting point when thinking about the insurance you need:

• Is someone relying on me to pay the mortgage?
• How long would my savings last if I lost my income?
• How would I cope having medical treatment whilst having to work?
• Will this insurance give me more peace of mind?

What type of cover do I need?

When deciding on the cover you need, it’s worth keeping in mind the pros and cons. 

With trauma cover, for example, a claim payout means you’ll have a lump sum to help you meet the costs of medical treatment when your life is interrupted by a serious illness. Income protection, on the other hand, will pay you a set amount each month when you’re unable to work due to illness or injury and there may be a waiting period before you start getting your payments. 

Both types of cover could definitely help if you were to have a brush with cancer or a stroke that’s serious but not life-threatening.

And if it’s a condition that leaves you unable to work or care for yourself for the rest of your life, then you may be eligible for a claim payout on a Total and Permanent Disablement (TPD) policy. 

Taking out every type of policy is one way to make sure you’ve got the cover you need if the worst were to happen.  But this ‘cover all bases’ approach might cost more than you can afford. So how do you choose a combination of policies and premiums that adds up for you?

It’s all about you

The type and level of insurance cover that’s right for you, very much depends on your situation. There is no automatic answer or cookie cutter approach to getting it right for you. This is why working with a financial adviser can be a great way to choose insurance cover that suits your circumstances. They can take your personal situation into account and use their expert knowledge to make recommendations that are a good fit.   

Getting covered for a year's worth of your salary can be a good starting point. Knowing you've got 12 months of income to see you through a period of illness can do a lot for your finances and peace of mind. 

But when illness strikes there may be more to it than getting regular payments to help cover your regular expenses. That's why expert advice can be so important in helping you decide whether Income Protection or Trauma cover - or both - are the best choice for your circumstances.

Things to keep in mind

If you’re taking a DIY approach to narrowing down your options, these are some of the critical factors that are going to influence what’s best for you:

You and your circumstances

• Your work, age and partnership status
• The number and age of any dependants
• Whether you’re a renter or home owner
• How much you owe on your home loan (if you have one)

Your expenses and debts

• Your total monthly living expenses
• How much you owe in loans and debts (apart from your main mortgage)

Your income and assets

• Your annual income – and your partner’s income if applicable
• Any additional income you or your partner earn
• Any assets you have – including cash, property and investments

A good rule of thumb for your level of cover

You probably don’t have a seven-figure salary or a $10 million dollar property you’re paying off. Getting enough cover to give you some peace of mind and a bit of breathing space if your health takes a turn for the worse may be enough.

Source: MLC

 

Reducing risk in retirement

We all think things will turn out better for ‘us’ than ‘them’. Such optimism can serve us well in life, but when it comes to money, balancing bias with facts is a much safer option. 

When it comes to your retirement there are four main risks that can impact your income:

1. Longevity risk

As you don’t know how long you will live, there is a chance that you could outlive your income or that you will have to rely solely on the Age Pension that may be insufficient to cover your basic living costs. 

2. Inflation risk

Even small increases each year to the cost of living can, over time, have a significant impact on how far your money will go. Without the right strategies in place, increases in inflation over time could mean your retirement income will no longer cover your living costs.

3. Market risk

Exposure to investments such as shares and property comes with the risk of market volatility. When investments earn negative returns, your retirement savings are falling in value. It’s important to consider how best to minimise the impact on your savings from market volatility during a 20-30 year plus retirement period.

4. Sequencing risk

Poor returns on investments when your savings are at their peak may significantly impact just how long those savings will last. In retirement, timing is everything. If the order and timing of your investment returns is unfavourable, it could result in your retirement income running out sooner than expected.

So, how can you reduce risks in retirement? One option is a lifetime annuity.

Lifetime annuities give you an additional layer of protection in retirement and can act as a safety net giving you income for life, regardless of how long you live.

Annuities works by complementing your other investments, together with the Age Pension (if you’re eligible). A lifetime annuity provides a foundation that you can depend upon to cover your basic living costs. Whilst they are designed to be held for life, there are withdrawal periods where you may access a lump sum if necessary. 

Everyone’s financial situation is different – so it’s a good idea to seek professional advice. Contact your financial adviser to determine whether an annuity is right for you.

Source: Challenger

 

How first home buyers accessed $415m under the First Home Super Saver Scheme

Did you know, you could take advantage of potential tax benefits inside super to save for your first home? 

It’s been called the Australian Dream by many – owning a home. However, saving for a deposit on one can sometimes be challenging.

For this reason, the government started the First Home Super Saver (FHSS) Scheme on 1 July 2018 to help aspiring homeowners save towards a deposit on their first property.

A number of prospective buyers have taken advantage of the scheme to help reach their goal of home ownership, with the Australian Taxation Office (ATO) revealing $415 million had been accessed under the scheme since it begun^. 

If you’re wondering if the FHSS Scheme could be a path to you owning your first home, read on to find out about potential advantages and how it might work for you. 

1. How does the FHSS Scheme work?

Under the scheme, you can save for your first home by adding additional money to your super account in the form of voluntary contributions.

This includes some types of concessional (before-tax) contributions and some non-concessional (after-tax) contributions. 

If you’re eligible, you can later withdraw this money, including associated earnings, less tax, to put towards a deposit on your first home. 

2. What types of contributions count toward the scheme?

• Salary sacrifice contributions, which you might set up with your employer, on top of any compulsory contributions they might pay you, if you’re eligible.
• Tax-deductible contributions, which are made using after-tax dollars, for instance with the money in your bank account, which you then claim a tax deduction for at tax time.
• Personal contributions, which you make using after-tax dollars, but don’t claim a tax deduction for.

Super contributions that don't count

• Compulsory employer contributions, which your employer may be required to pay you under the Government’s Superannuation Guarantee. 
• Spouse contributions that a partner may be paying into your super for you.

3. Is there a limit on how much can be withdrawn?

You can apply to withdraw eligible voluntary contributions you’ve made since 1 July 2017, up to a maximum of $15,000 per financial year and $50,000 in total per person.

 Partners can also combine their own eligible contributions towards the purchase of the same property.

4. What can the money be used for?

Eligible first home buyers can use money withdrawn under the scheme to put toward residential property, or land, provided a contract to build the home is entered into within the set timeframes. Houseboats and motorhomes are not included.

5. What are the savings benefits?

A key advantage of the scheme is that the earnings on the money you contribute to your super fund are taxed at up to 15%. This may be lower than the tax rate you'd pay on earnings received outside of super, which are generally subject to your personal marginal tax rate.

Check out the table below to see how tax on super compares to individual income tax rates for Australian tax residents for the 2023-24 financial year.

Taxable income           Marginal tax rate     Max tax on earnings inside super
$18,201 - $45,000         19%*                          15% 
$45,001 - $120,000       32.5%*                       15%
$120,001 - $180,000     37%*                          15%
$180,001 and over        45%*                          15%
* Plus up to 2% Medicare levy where applicable.

Another important advantage is that if you make salary sacrifice or tax-deductible contributions to super, those contributions will be taxed at 15% rather than your marginal tax rate, which could result in a significant tax saving, depending on your situation. There are also generally tax concessions when the contributions are withdrawn. 

6. What tax is payable when the money is withdrawn?

When you withdraw amounts that were contributed under a salary sacrifice arrangement or as part of a tax-deductible contribution, you’ll have tax withheld from the money you receive.

This money (including any associated earnings) will be taxed at your marginal tax rate (like your employment income), but with a 30% tax offset, which reduces the tax you pay.

If you’ve made personal contributions under the scheme that you’ve not claimed a tax deduction for, no tax will be payable on these amounts when they are withdrawn from super.

Another thing to keep in mind when it comes to tax on super are general contributions caps, as penalties apply if you go over these limits.

7. What other eligibility criteria applies?

• You must be 18 or older to make a withdrawal under the scheme.
• You can’t have owned property in Australia before.
• You must live in the property for at least six months within the first 12 months after buying.
• You must not have previously made a withdrawal request under the scheme.

 8. What happens when it’s time to withdraw the money?

Here’s what you’ll generally need to do:

• Get a FHSS determination from the ATO to find out how much you can withdraw.
• You can request unlimited determinations, but can only make one withdrawal request.
• Buy a home or enter into a contract to build a home within 12 months of the withdrawal. Extensions may apply.
• If the purchase doesn’t go ahead, within the allowable timeframes, the money may either be put back into super or will incur further tax of up to 20%.

9. Where else can first home buyers find information?

Additional rules may apply, so do your research before making any decisions. You can visit the ATO website for further details on the FHSS Scheme.

You may also want to check your state or territory’s First Home Owner Grant information to see what else you may be eligible for.

Source: ATO First Home Super Saver Scheme data

Source: CFS