Managing money on a low income

Increasing living expenses and commitments can make it challenging to manage and save money, especially for low income earners. Here are some tips that may help you reduce financial pressures on a low income…

Prioritise high-interest debts:
If you have a lot of different debts to pay off, prioritise them by their interest rates. Paying off high-interest debts first can prevent you from unnecessarily losing money from interest fees.

Track your income:
Keeping track of all your income, whether it’s wages, government support or investments, can help you get a good sense of how much you’re able to spend and at what time. This can prevent you from spending too much too soon before your next income payment, and plan out the best time to pay major expenses without running out of money.

Budget:
Creating a spreadsheet with your expenses and income can help you maintain an appropriate amount of spending and tell you if you’re overspending. It may take a few tries to develop a budget that suits your lifestyle, but trial and error will provide you with an accurate estimate of how much you need to set aside for different expenses. Sticking to your budget will help you grow your savings every week.

Automate savings:
Setting up automatic transfers into your savings accounts can put you into the habit of spending less. This can be especially useful if you struggle with budgeting and want to grow your savings.

Cut back on expenses:
Unnecessary spending, such as entertainment and eating out expenses can be cut down to maximise your savings. Simple things such as packing a home-made lunch and opting for a home movie night instead of the cinema can make a huge difference if you keep it up.

Smooth your bills:
If you struggle to pay large bills all at once, contact your utility providers and ask them if they will let you smooth your bills. This means that you can make small payments more frequently instead of paying one big bill once a year. This may make it easier to budget your expenses and maintain a steady income/expenditure balance.

Increase your income:
You can increase your income by starting a side hustle or making an effort to generate more money by simple tasks such as blogging, pet sitting and selling possessions you don’t need. This can reduce the amount of financial strain you may be under.

BAS lodging and government funding eligibility

As part of the second $66 billion support package in response to COVID-19 and its negative effects on the Australian economy, the Federal Government has expanded tax-free cash payments to small and medium businesses with a minimum payment of $20,000 and maximum of $100,000, up from the previous $2000 to $25,000 range.

However, it is important to note that payments are only given to eligible businesses after they lodge their BAS (business activity statements) by the 28 July and 28 October 2020 due dates.

The new enhanced scheme will be delivered in two phases:

1. Employers are set to receive a first payment equal to 100% of their salary and wages withheld (a maximum of $50,000) when lodging their activity statements at quarterly due dates.
2. An additional payment equal to the first payment made after businesses lodge their BAS by 28 July and 28 October 2020.

Businesses will receive payments based on their BAS lodgement schedules. For example, a business that receives a payment for the period up until June 2020 will receive the same amount for the period up until September 2020 upon the lodgement of their BAS in two separate occasions.

For monthly BAS lodgers, businesses will receive their first payment for the March 2020, April 2020, May 2020 and June 2020 lodgements, with a 300% calculation in the March activity statement to provide the same treatment as quarterly lodgers. Similarly, the second payment businesses which lodge their BAS monthly will be released once they lodge their June 2020, July 2020, August 2020 and September 2020 lodgements.

To remain eligible to receive the new government funding for small to medium-sized businesses, remember to lodge your BAS on time as per your usual schedule. There are several options you can consider to lodge your BAS:

1. Lodge online through your myGov Business Portal
2. Lodge through your tax or BAS agent (who can access your myGov)
3. Lodge as “Nil BAS” if you have nothing report for the period online or through phone
4. Lodge by mail

What to consider before taking out a business bank loan

Many businesses, whether they are only just starting up or have been in the market for a number of years, will need a bank loan at one time or another. However, before you apply for a bank loan, it is important to think things through to ensure that you know if you should get one, if you are getting it at the right time and how you can make the most out of a loan.

Here are some questions business owners should ask themselves before beginning their bank loan application:

How likely is it that I qualify for the loan?
If you believe that your business won’t qualify for a bank loan, then you will only hurt your credit rating if you apply for a loan you won’t get. Being rejected for a loan can also make it more difficult for a business to borrow in the future.

Will the loan help the business grow?
Instead of using the loan for aspects like routine operating expenses that don’t generate much revenue, owners should consider putting the borrowed money into parts of the business that will generate more revenue and help reduce future borrowing needs.

How much do I need?
Before making requests of the bank, try to make an accurate estimate of how much cash you’ll really need. You can do this by creating a cash flow forecast with projections of your monthly income and expenses.

Are my personal finances in order?
Until a business reaches a substantial size, many banks will rely heavily on the owner’s personal financial statements and credit scores to determine the business’s creditworthiness. This may involve bankers looking at your personal information like student loans, personal credit card debt and mortgage payments.

Do I have adequate documentation for the loan?
When applying for a business loan, you will need a lot of documentation. Requesting a loan when an owner is not fully prepared makes the business look unprofessional.

Do I have adequate cash flow to repay the loan?
When a business owner applies for a loan, their banker will require the owner’s estimated financial projections for the business. It is important for owners to include their debt repayment plan in those projections.

When do you have to pay tax on shares?

Investing in shares is a popular method of growing your wealth, however, there are tax obligations you need to be aware of to get an accurate sense of how much you’ll need to put aside for your investments.

When you own shares, you need to declare all your dividend income on your tax return. It is possible to claim tax deductions for certain expenses you pay to receive income from your shares. The deductions you are eligible for will depend on if you are carrying on a business of share trading or if you are an individual share investor, but they can include:

• Management fees: the payment of ongoing fees or retainers to investment advisers are tax-deductible.
• Borrowing expenses: the expenses of borrowing money for shares may be tax-deductible. This can include establishment fees, legal expenses and stamp duty on the loan.
• Interest: if you received a loan to buy shares, you can claim a deduction for the interest incurred on the loan if it is expected that assessable dividends will be derived from your shares.
• Travel expenses: if you need to travel for the sole purpose of working on your share investment, such as travelling to consult with a broker, you may be able to claim a deduction for the travel expenses incurred.

Individual share investors cannot claim a deduction for the cost of acquiring shares, such as costs for brokerage and stamp duty, however, they can claim deductions on the prepayment of expenses related to the shares such as internet fees or seminars.

Buying and selling shares can involve capital gains tax (CGT), depending on whether you make a capital gain or a capital loss on your shares. Your capital gains or loss is the difference between the price you paid for the shares and the price you sell them for. If you end up selling your shares for more than you paid for them, then you make a capital gain which may be taxed.

How much CGT you need to pay varies depending on:

• How long you’ve owned the shares for: if you have held the shares for more than 12 months, you can usually discount a capital gain by 50%.
• Your marginal tax rate: your capital gain will be added to your assessable income in your tax return and taxed as part of your income at your marginal tax rate.
• If you’ve also made any capital losses: only your net capital gain will be taxed with your assessable income, meaning that if you’ve also made capital losses then they will be subtracted from your capital gains. If you have more capital losses than gains, you are generally able to carry the capital loss forward and deduct it from any capital gains you make in future years.

What to know about reverse mortgages

A financial dilemma that is becoming increasingly common is finding a way to fund a comfortable retirement lifestyle without having to sell the family home. One solution to this is a reverse mortgage; a loan that allows homeowners to convert part of the equity in their home into cash.

Money from a reverse mortgage can then be received as a regular income stream, line of credit, lump sum, or a combination of these options. No income is required to qualify for a reverse mortgage, which makes them ideal for those who have retired from the workforce.

Given the nature of this type of loan, it is important that homeowners understand the risks involved and consider how they can protect themselves as much as possible. Risks associated with reverse mortgages include:

• The interest rates are usually higher than average home loans.
• Variable interest rates mean that there will be changes to what you are charged over time. Debt can rise quickly since the interest compounds over the loan term.
• The loan can affect your pension eligibility.
• Drawing funds from your property can reduce what you could potentially access later on, leaving little left for aged care or other future needs.
• For those who fix their interest, the costs to break the agreement can be very high.
• If you are the sole owner of the property and someone lives with you, that person may not be able to stay when you die (in some circumstances).

Bad money habits that are getting in your way

How you spend your money determines how well you can save you money. Spending more than you have or buying unnecessarily can severely impact how efficiently you can save. Sometimes you aren’t even aware of the small habits that are actually limiting your savings capabilities. Here are a few bad money habits that are getting in your way.

Not having a budget:
Spending a substantial amount of money each month on purchases and experiences adds up. Not preparing and sticking to a budget is a common mistake, as many people believe that a budget isn’t necessary for their lifestyle and income. Regardless of how much you earn, individuals need budgets to know where their money goes and what needs to be set aside to achieve their goals.

Eating Out:
Dining in restaurants or grabbing take away most nights in the week is a good way to deplete your finances. Save money by eating out one or two nights and cooking the rest of your meals in bulk at home. Preparation of food will help on those nights when you don’t want to cook and stops you from ordering food.

Impulse Buying:
Purchasing items without a second thought is an easy way to lose money. A good way to avoid this can be to ask yourself if you are buying something because you ‘want’ it, rather than if you ‘need’ it? Learn how to recognise when you do the action and force yourself to wait. You can then consider if you have the extra money to spend on that item, giving you time to properly think about your decision.

What you need to know about BFAs

A Binding Financial Agreement (BFA) is the Australian equivalent of a prenup. It is used to agree in advance on how a couple’s property and other assets would be distributed should their marriage or de facto relationship break down. The Agreement can cover financial settlement, spousal maintenance and any other incidental issues.

BFA’s can be entered into at any stage of a relationship, i.e. before, during or after a marriage or de facto relationship. Couples may consider entering into a BFA if one party has more property, assets or is expected to receive an inheritance at a later stage.

Some benefits of entering a Binding Financial Agreement include:

• Establishing a level of reassurance if one or both partners has been through a separation or divorce before.
• Protecting some or all of the assets from each party.
• Being able to specify the ground rules when it comes to how the couple will acquire property, who will pay the bills, and where weekly wages or income will be saved.
• Preserve family or other businesses for future generations.

Properly drafted and executed BFA’s are particularly beneficial for those who want to establish a level of reassurance that there would be a harmonious division of property and assets in the circumstance of separation or divorce without the need for stressful court action. A BFA can also make both parties feel secure knowing that any property or assets accumulated before their relationship or marriage is safe.

What you need to know about investment bonds

Investment bonds are a practical investment option for those who earn a high income and seek long term tax efficiencies.

Investment bonds, also known as tax-paid, insurance or growth bonds, work similarly to a managed fund, except they are combined with an insurance policy. There is a ten year rule which allows tax free earnings on the bond if no withdrawals are made in the first ten years and contributions do not exceed 125% of the previous year’s contribution. Most investment bonds offer a range of investment options to cater for differing risk levels such as cash, fixed interest, shares, property or a range of diversified investment options.

Investment bonds are particularly suitable for high income earners with a marginal tax rate higher than 30% who want to build wealth without increasing their personal tax liability. They are also useful for estate planning purposes as beneficiaries other than dependants can be nominated and will not incur tax upon receiving proceeds.

Investments held in an investment bond are generally not subject to capital gains tax (CGT). Where an investment does not qualify for a CGT discount, the maximum tax rate of 49% may apply on earnings whereas an investment bond generates a maximum rate of 30%.

However, investment bonds do carry some risk that individuals should consider before making a decision. Common fees such as establishment, contribution, withdrawal, management, switching and adviser service fees may be applicable depending on your provider and the investment options you choose.

Strategies to increase profit

Whether you are struggling to keep up a steady income or wanting to grow your business, increasing sales revenue is often a central goal for businesses. Here are some strategies you can consider when looking to improve profit:

Redesign operations for maximum efficiency:
If you really look at the operation processes of your business, you’ll often find that there are certain systems and routines in place that may not be necessary. Try to eliminate the tasks and activities that do not make valuable contributions to the business. Look for any operation processes that can be streamlined to maximise efficiency and save time.

Increase marketing efforts:
Oftentimes, you’re going to have to spend money to make money. Many businesses benefit from investing in a strong marketing campaign or even looking for cost-effective marketing opportunities on social media. Sharing regular updates on social media about your business, pictures of your products or interesting content your followers will like is a great way to keep your business in people’s minds and build a rapport with your customers.

Take care of existing customers:
While it is easy to get carried away with getting as many new customers and followers as you can, don’t forget that it is often easier and cheaper to make a sale to an existing customer than a new customer who you have not developed a relationship with yet. Existing customers will have more trust in your products or services if they have already had a positive experience with your business. Put effort into maintaining a good relationship with existing customers and focus on cross-selling and upselling products and services to them.

Are you prone to emotional overspending? 

Online shopping is available 24/7, making it easy to indulge in retail therapy whenever you’re feeling low. With many consumers using PayPal or saving their credit card details on Google, spending money is so easy that it may not feel like a big deal when clicking the ‘order’ button. While treating yourself every once in a while is normal, making poor and impulsive spending decisions often occurs when you’re in a bad frame of mind.

A 2019 comfort spending report by Mozo found that 81% of Australians are spending money as something to do when they are bored, or to make themselves feel better when they are stressed or anxious. Nationwide, comfort spending reaches $25.5 billion a year, which averages out to $1,430 a year.

Here are some ways you can deal with comfort spending:

• Get into the habit of doing a different activity when you’re bored or stressed. There are many hobbies that would benefit your mental and physical health more than shopping, such as taking a walk or talking to a friend.
• Give yourself some financial freedom. If you immediately implement an over-restrictive budget, you might be tempted to splurge after feeling deprived. Try to find a balance between treating yourself every now and comfort spending as a habit.
• Recognise your comfort spending behaviour and set a budget for it, instead of eating into your savings
• Avoid using a credit card, or if you do, make sure you pay the balance off in full each month.