Financial planner offers wage rise increase advice for ECEC
Certified financial planner Toby Perkins, who uses his 15 years of experience in his role with NGS Super, has prepared the following advice and insights for those who will be receiving the wage rise to support and guide in this space.
Before accessing this advice readers should be aware that it is general in nature, and should consider their own personal circumstances and consult with a professional for advice which is tailored to their needs.
Avoid income creep
The term ‘income creep’ can refer to the situation where pay increases (or increases in disposable income) get taken up by additional or increased lifestyle expenses, rather than going towards genuine savings, Mr Perkins explained.
While this phenomenon can be quite common, the relatively high level of inflation over the past couple of years means that some level of pay increases are genuinely needed just to maintain the same lifestyle.
If someone is in a position of having a real increase in disposable income (or they just want to start saving and are happy to make some compromises with their lifestyle) and wanting to make sure if doesn’t get absorbed by normal expenses, some things to consider are:
Setting aside a regular amount each pay in a separate bank account (or offset account). Make sure this is money that you can genuinely go without, and not something you may need to dip into every few months. Make sure you distinguish between savings for lifestyle expenses such as holidays, compared to genuine longer-term savings – for example putting towards saving for a home, paying down a mortgage, or saving for retirement. If you’re saving for short-term lifestyle expenses, it’s a good idea to keep this separate from genuine long-term savings. If you have debt (for example a mortgage), it may be worth considering ‘saving’ by making extra payments. If you’re disciplined and aren’t going to be tempted to dip into it, an offset account can be an effective way to save interest, but also keep access to the money for an emergency. Consider making some voluntary contributions to super. Salary sacrifice can be a tax-effective way to contribute to super (depending on your taxable income) and save for your retirement. If you make a personal after-tax contribution to super and your income is below $60,400 you may qualify for a government co-contribution. Keep in mind that you won’t be able to access this money until retirement. Having a separate emergency fund can be a good idea. This can reduce the chance of having to dip into your long-term savings, or needing to stop a regular savings plan.The power of compound interest
“If you’re wanting to put some of your regular pay aside to save for your retirement, superannuation can be a great way to do this (depending on your situation),” Mr Perkins said.
“One potential benefit of doing regular contributions is that it can be easy to manage with your cash-flow. For example with salary sacrifice, the money gets paid directly into your super, meaning you don’t have to worry about managing it yourself, and you can’t be tempted to spend the money instead.”
Salary sacrifice (depending on income) can also be a very tax-effective way of making contributions to super, he continued.
“As an example, if you’re on the 32 per cent marginal tax rate (including Medicare levy), you’ll save income tax at this rate, with the contributions being taxed at a lower rate of 15 per cent when they hit your super fund. In this example – due to the tax saving – the amount that is getting invested in your super is greater than the amount you are giving up from your take home pay.”
Employers may offer the option to make regular after-tax contributions through payroll, or this may need to be self managed.
“If you want to start saving for your retirement but don’t feel you can afford much, there is nothing wrong with starting small,” Mr Perkins continued.
“You may be able to afford to gradually increase this over time. When it comes to investing for the long-term, the power of compound interest means the earlier you start the better.”
NGS has a range of fact sheets, general information, a retirement calculator or the option to book a free chat with an NGS Super Specialist at a time to suit you.
