It’s July and temperatures are falling across the country. It may be chilly Downunder but Aussie women are on fire in the northern hemisphere, with Ash Barty, Sally Fitzgibbons and Hannah Green victorious in tennis, surfing and golf.
All eyes were on interest rates and the ongoing US-China trade war in June. In Australia, the Reserve Bank cut its official cash rate by 25 basis points to an historic low of 1.25% with more cuts anticipated. In the US, Federal Reserve chair Jerome Powell said the case for cutting rates had strengthened. This led to a fall in the US dollar, with one Aussie dollar now buying US70c, up more than a cent over the month.
The RBA is concerned about emerging signs of a slowing economy. Australia’s annual economic growth fell from 2.3 per cent to 1.8 per cent in March, the weakest since 2009. Local unemployment is stuck at 5.2 per cent compared with 3.6 per cent in the US. Inflation at 1.3 per cent is well below the central bank’s 2-3 per cent target band. Retail trade fell 0.1 per cent in April with annual growth down from 3.5 per cent to 2.8 per cent. New vehicle sales were down 7 per cent in the year to May, the biggest annual decline in 9 years.
On a more positive note, Australia’s trade surplus was a record $37.7 billion in the year to April with record China imports and exports. Iron ore prices at US$115 a tonne are up almost 72 per cent year on year. And in the aftermath of the federal election, the NAB business confidence index rose from 0.1 points in April to 7.3 points in May, the biggest lift in almost 6 years.
Tax time can often feel like a hassle, but it’s all worth it when that tax refund lands in your account. So, what’s the best way to spend it?
With last year’s average refund being $2,574, it’s no small question.i And if you are one of the lucky ones to receive a refund your options are endless. From paying down debt to investing in your future to blowing it all on a big holiday, the choice of how you spend your refund will depend on your goals and your circumstances.
Pay down debt
It may not be particularly glamorous, but paying down any debts you have can be a very wise way to spend your tax refund. Especially because you’ll probably save even more on the future interest you won’t end up paying.
Australians have a whopping $45 billion in credit card debt.ii Consider clearing any overdue balance, and while you’re at it why not reduce your limit so you’re not as likely to go that far again.
You might also consider putting some of your tax refund towards your home loan. Again, a $2,000 reduction in what you owe now could mean a much bigger saving over the lifetime of your loan.
Invest in your future
Your tax refund could also be a fantastic way to pay for an investment in your future.
A good way to start is by putting a little more towards your super. Superannuation is still the most tax effective way of saving for the retirement you dream of, and the interest on the additional contribution now could compound to make a big difference to the overall size of your nest egg.
Investing in your future might also mean taking a short course to upskill, or diversify your talents. There are TAFEs and adult education facilities across the country that offer a plethora of short courses from the vocational, to ones that purely play to personal interest. Have a google and see what’s going on in your neighbourhood.
If you’re feeling generous, you might even consider directing some of your refund towards the future of a loved one. This might include starting a fund to help your kids towards a house deposit, a first car or their future education. Talk to us about what your options are.
Save for a rainy day
It’s awful to think about, but you never know what the future holds, so having a little money aside for a rainy day is never a bad idea. It might help with future medical expenses or a loss of income, or even those everyday unexpected expenses such as a broken fridge or car repairs. Getting in the habit of putting a portion of your tax refund towards a rainy-day fund could make a real difference if life takes a turn for the worse.
Have a little fun
You work hard, and there’s nothing quite like the feeling of having a few extra thousand in the bank. So, you’ll be forgiven if you want to have a little bit of fun. From a weekend away to a retail binge, there are many ways you can blow a tax refund. Our advice to you: be cautious. By all means splurge on some pampering, but make sure you get the mix right by either reducing any unpaid debt or investing in your future.
The right mix
The truth is you can use your tax refund in a number of ways and none of them are right or wrong. Perhaps the wisest thing to do then is mix it up, spending the bulk of it prudently while saving a little bit just to do something that really makes your heart sing.
If you need any help with your tax return, give us a call.
i https://www.moneysmart.gov.au/managing-your-money/income-tax/how-australians-spend-their-tax-refunds
ii https://www.abc.net.au/news/2018-07-04/1-in-6-credit-card-users-struggle-under-mountain-of-debt/9936826
Checking in on your goals, finances and health
We don’t think twice about taking our car in for a regular tune up. Why? Because we know it’s going to mean our car runs at its best and saves unexpected problems down the track. It follows then that we should take the same approach to other areas of our lives. From our goals, to our finances, to our health, there’s so much to be gained in checking in regularly to make sure everything’s tracking well.
Kick your goals into gear
A good place to start is with your goals. If you set some at the beginning of the year, take some time to reflect on how you’re tracking. If you didn’t, there is no time like the present to stop and think about what you want for your future.
The next step is to make a plan. This will involve writing down your goals then looking at what resources you’ll need to help you achieve them. You want to make sure you have allocated enough hours and dollars towards making them a reality. This will also dictate your overall timeframe. Set regular, realistic deadlines with measurable sub-goals and make sure you have someone in your corner to hold you accountable.
Remember too, that your goals don’t need to be bigger than Ben-Hur. They might just be to see more of your friends or put a bit extra aside each month for a holiday. Reflect on the little things in life that bring you joy, and what you can do to pursue them.
Fueling up your finances
Once you’ve got a handle on your goals, it’s a good idea to review your finances. The new financial year presents the perfect opportunity.
Start by reviewing your budget. If it’s not currently working for you, what changes can you make to start taking meaningful steps towards your goals? Maybe there’s an online subscription you aren’t using or you’re having one too many meals out. Shopping around for a better deal on your utility bills, as well as the interest rate on your mortgage and credit cards, is another worthwhile consideration.
It’s also wise to take a proper look over your investments. Review your asset allocation and risk tolerance to make sure that your approach is still in line with your present situation as well as future goals.
For many of you, your biggest and most tax-effective investment will be your superannuation. It makes sense then to ensure you’re comfortable with what your fund is returning as well as your current risk profile.
Your super may also include some level of insurance cover. If your circumstances have changed, it might be time to review. We can assist you in assessing whether you are adequately protected, looking at options both within and outside of super.
Get a handle on your health
Even if you’re feeling fit as a fiddle, a regular health check-up can be a worthwhile investment of both time and money that could help you to live a long, happy and healthy life. If you have reached a milestone birthday it’s worth speaking to your GP about any recommended tests.
Likewise, your physical health doesn’t start and end with a doctor or dentist visit. Getting into some exercise habits now and changing your eating habits could bear dividends for your long-term health and well-being.
Someone in the passenger seat
No matter where you’re going it’s always helpful to have someone in the passenger seat to help you navigate the way. For your goals and your passions, it might be a friend, partner or family member. For your health, it’s a doctor. And when it comes to your finances, we can help you protect the lifestyle you have, while mapping out the journey to achieve your ideal future.
If you need help with the financial aspects of your annual tune-up, give us a call. We’re always here to help.
Making the most of falling interest rates
The Reserve Bank’s decision to cut official interest rates is good news for anyone with a mortgage or hoping to buy their first home, but presents a challenge for savers. Whatever your personal situation, the question now is how to make the most of falling rates.
On July 2, the Reserve Bank cut the official cash rate for the second month in a row by 25 basis points. This second rate cut saw rates falling from 1.25 per cent to 1 per cent, the lowest on record. Many economists predict further cuts, with some suggesting rates could fall to as little as 0.5 per cent.
Just how low rates go will depend on the broader economy. Growth in the three months to March was up just 0.4 per cent, or 1.8 per cent over the year. The Reserve Bank is also concerned about sluggish wage growth, unemployment stuck at around 5 per cent and inflation of 1.3 per cent well below its target 2-3 per cent range.
Rather than wait to see how low rates will go, there are things you can do now to take advantage of lower rates or minimise their impact, depending on your personal circumstances.
Grab a better home loan deal
Many banks moved quickly to cut home loan interest rates in the days following the Reserve Bank’s move, although not all of them passed on the full amount.
The average standard variable rate offered by the big four banks is now between 4.92 and 4.98 per cent, saving the majority of variable rate homeowners over $100 a month.i
The big four also cut their discount rates, while some smaller lenders are offering rates as low as 2.89 per cent. The lowest 1-year fixed rate is below 3 per cent.
While house prices and interest rates continue to fall, the stars could finally be aligning for Australians wanting to buy their first home.
The Australian Regulation Prudential Authority (APRA) plans to relax the minimum 7 per cent interest rate banks are required to use when assessing borrowers’ ability to service a home loan.
Also, the Morrison government proposes low deposit financing for eligible first home buyers who save a deposit of as little as 5 per cent up to 20 per cent to purchase property.
For people with existing home loans, it’s time to check whether you are getting a good deal from your lender. If not, ring them to negotiate a lower rate and be prepared to shop around if they won’t budge.
The outlook for savers
Lower interest rates can be more challenging for savers. That includes anyone with a savings account as well as retirees who depend on the income from term deposits to help with living expenses.
Term deposit rates are likely to head south of 2 per cent. The best interest rate for $10,000 invested in a 1-year term deposit is currently around 2.5 per cent.
Banks have also been cutting rates on their online savings accounts. The best rates on offer are currently around 3 per cent for the first four months, before dropping to a base rate around half that, so shop around and read the terms and conditions.
The hunt for yield
If you have a longer time horizon, growth assets such as shares and property can provide regular income. If you can ride out the short-term fluctuations in share and property prices, the income they provide in the form of dividends (shares) and rent (property) tend to be more stable and reliable.
The national average rental yield on Australian residential property is sitting at around 4.1 per cent.ii Coincidentally, Australian shares currently provide an average dividend yield of 4 per cent (7 per cent after franking) but many quality companies pay more.iii
For example, the big four banks currently offer dividend yields of between 5.2 and 6.8 per cent. After franking credits are included, the yields grow to 7.5 and 9.7 per cent respectively.
Whether you plan to borrow or pump up your income, falling interest rates offer opportunities and challenges. If you would like to discuss the impact of lower rates on your investment strategy, give us a call.
i ABC, 3 July 2019, https://www.abc.net.au/news/2019-07-03/what-the-rate-cuts-mean-for-you/11273500
ii CoreLogic, 1 June 2019, https://www.corelogic.com.au/sites/default/files/2019-06/CoreLogic%20home%20value%20index%20JUNE%20FINAL.pdf
iii AFR share online market tables, 24 June 2019