Hi, I'm a 28-year-old self-employed male wondering whether I should invest my surplus cash flow via super (deductible contributions) or in my own name personally? I'm worried about tying up my money for such a long time but am aware of the tax benefits if I'm in the 37-cent tax bracket.
Sam in Curtin, WA
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Hi Sam, this is actually a really common question that I get from a lot of people and there is no right answer – everyone is different. What I will say why does it have to be one over the other and are there any other options? In normal circumstances we would look at your cash needs over the next couple of years and the goals that you are hoping to achieve to determine the best fit for you but generally you should consider the pros and cons of the following options.
Paying down debt – A major consideration for any surplus cash should always be the repayment of any debt, especially personal debt. If you have any credit card dent or personal loans lets get this paid off and free you from worrying about this. These are generally high interest rate loans and have no tax advantages whatsoever. Paying extra off a home loan is also a good option to consider. Even though home loan rates are at record lows now it is still a non-deductible debt and therefore has no tax advantages. You have any of these debts you should strongly consider directing at least some of your surplus cash flow to paying this off. Once paid off it will also result in additional surplus cash flow for investments as you won’t have any minimum payments to meet.
Super contributions – Super remains the most tax affective investment option for saving for your future retirement. Concessional super contributions are taxed at 15% which is much better than your current rate of 37%. Most super funds allow a wide range of investment options including managed funds and direct shares and any earnings are also taxed at 15%. There are limitations in that you can only make concessional contributions of up to $25,000 pa which includes your employer contributions and your money is tied up until retirement. Directing some of your surplus cash flow here is generally a good idea as relying solely on employer contributions to meet your retirement needs is unlikely to be enough, however be careful about locking all your money up in super especially if you foresee needing funds in the future.
Personal investments – Investing money in your personal name does not offer direct tax advantages, however there is one big advantage – the money is available if needed. You can slowly build up your portfolio every month using your surplus cash flow and watch your investments build over time but if you need access for an emergency or for any other reason you have the ability of selling down your investment. Be aware that there may be tax consequences in doing this.
Cash – I would also suggest looking at building up some cash reserves to act as a buffer in case an unexpected bill comes up or work slows down, and you are forced to reduce your salary. The current climate has shown that having a cash buffer readily available can be valuable.
Consider the above options and consider what you want to achieve over the next couple of years in order to make your decision on what to do but if possible, I would like at a combination of the above in order to take advantage of the positives of each.
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