There is a saying on why you should never discuss politics or religion with friends, so I will tread carefully in this blog.
The Federal Budget was released last week and what I found interesting wasn’t what was said, but rather what remained unsaid.
Specifically, there was no mention whether the Government intends to scrap the planned Stage 3 tax cuts that are due to come in next financial year.
The budget itself didn’t offer much in the way of news.
Like I mentioned in my blog earlier this year, the Government continues to spend more money than it earns.
The Government will collect $625 billion and spend $651 billion. Any Australian who ran their house that way would be in mortgage default.
The Government will collect 26% more revenue this year than they did last year, which amounts to 30% more than the Government was spending in 2019 prior to the pandemic.
Thanks to a boom in mining exports, the Government will collect 10% more revenue this year than they did last year, which amounts to 22% more than the Government was collecting in 2019 prior to the pandemic.
Most people, when they earn more money, find new ways to spend it, such that no matter how much their income grows, their expenses grow by the same amount. I wrote in Bulletproof Investing that we will always spend as much as we earn, unless we make a clear and conscious decision to determine whether an expense is something we ‘need’ or simply something we ‘desire’.
It’s something a lot of Australians struggle with – in fact, the Commonwealth Bank of Australia says one in three Australians spend more than they earn each month.
It’s a hard thing not to do. Even our Government struggles with it! For this reason, I can’t see how it will be in a position to follow through with the planned tax savings next year.
But enough with the negativity. We can’t do anything about what the Government does. What we can do is control our own budgets such that, even with our household costs increasing, we find ways to ensure we don’t spend more than we earn.
My budget tool can help with that.
The other thing you can do is reduce the amount of tax we pay, without having to rely on the Government changing tax rates.
Have you ever considered how much tax you will pay in your lifetime?
This is what Australians pay in tax each year based on the income they earn:
The average Australian earns $92,030 per annum, which means paying a touch over $20,000 a year in tax.
Let’s say you start work at 18 and finish working at 65, that’s a 47-year working life.
47 years paying $20,000 per year in tax, means the average Australian will pay $940,000 total tax in their lifetime.
That’s more than the price of the median Australian house (today $897,768).
For the half of all Australians earning more than the average, their taxes are even more because of the tiered nature of our tax system.
If you earn $150,000 per year, you pay just over $40,000 per annum in tax (double the tax, but not double the income). That works out to be just under $1.9 million during their working life.
At the same time, the Government incentivises Australians to invest in their financial futures by providing tax benefits for the expenses put toward investments.
In property, that’s everything from the interest on a home loan, property management fees, rates, insurances and depreciation.
When I was 20 years old, I remember meeting a teacher who was earning the average wage, had built himself a multi-million-dollar property portfolio, and was getting $10,000 in tax refunds each year.
Imagine halving your tax bill each year. In the same example as above, that would mean the average Australian worker pays $470,000 in tax during their working life, instead of $940,000. And that $470,000 in saved tax instead went to paying off their home loan or building up their wealth so that they could be financially independent.
It made a lasting impression and I think every Australian must find a way to do it.
As I have said previously, I don’t think anyone in Generation Y onwards can afford to rely on a pension or 100% Government funding for health care (rebates on doctor visits and medications) as we age.
