You may have a regular savings capacity and/or you have built up a savings in a cash account, however, you are unsure where to allocate these funds.
The decision requires you to think of a number of factors:
Which account provides the best after-tax benefit and
Your goals - when you are likely to use these funds, how much you are likely to use and for what purpose.
If you have personal debts like credit cards or personal loans, in almost all cases, these are what you should allocate your money to first and pay them down as quickly as possible given the extreme interest typically charged.
The below table, illustrates rough estimates on the after-tax benefits of each option:
Account | After-Tax Benefit |
Credit Cards, Personal Loans etc. | 20.00% |
Pension Accounts | 8.90% |
Superannuation Accounts | 8.43% |
Investment Bonds | 7.97% |
Personal Investments | 7.44% to 8.90% |
Home Loans | 6.50% |
Savings Accounts | 2.65% to 5.00% |
Note: For the pension, super, investment bond and personal investment accounts, we have used the long term average of a high growth index fund. Capital gains tax has not been included as it assumed these investments are held long term. However, income tax has been included which is why the investments range from 7.44% to 8.9% net, depending on the applicable tax rate.
It is important to note that the after-tax benefit calculations consistently change based on the economy, interest rates and a persons marginal tax rate. This means your financial strategy should change as well to adapt to external changes.
Additionally, everything's goals and investment timeframes are also different, meaning that there is no possible once size fits all approach to allocate your funds. For instance, if your goal is to use your savings to buy a house in 12 months, it may be best to keep your funds in savings rather than investing the proceeds. Whilst the return may be lower, you would be protecting your savings from any market dips in the short term.
As a rule of thumb, it is generally best practice to pay off all personal debts first, then build a cash buffer (which could sit in your mortgage offset if applicable) of at least 3 months worth of living expenses before allocating money to the other areas.
If you need help deciding where to allocate your savings, you can book in an obligation free initial appointment.
General advice only. The purpose of this blog is to provide general information only and the contents of this blog do not purport to provide personal financial advice. We strongly recommend that investors consult a financial adviser prior to making any investment decision. The contents of the our blog does not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions. The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular product, investment or security. The information provided on this blog is given in good faith and is believed to be accurate at the time of compilation.
Comments