Grab your big chance to painlessly boost your wealth
In the next few weeks, every New Zealand wage or salary earner will get a chance to considerably increase their wealth — painlessly.
From October 1, pay packets will be noticeably bigger because of income tax cuts. You’ll have a choice: enjoy having a bit more in your pocket, or direct the extra money to where it can do the most good for you.
The first option might be more appealing, but it probably won’t take long before you don’t notice the difference. If you go with the second option, it could have a big impact over the long term.
Hang on a minute. On the same date, GST will rise from 12.5 per cent to 15 per cent. Shopping will be more expensive, so you’ll need the extra money to cover that, won’t you? To some extent. But for most people the tax cut will be bigger than the GST increase — often much bigger.
Try to ignore the higher GST. After all, prices of items such as fresh food often rise. And when the Kiwi dollar loses value, prices of imports and travel go up. You cope then, so you can cope now — if you really want to.
To find out how big your tax cut will be, use the nifty calculator at www.taxguide.govt.nz. It also estimates your GST increase, but we’re ignoring that, remember?
How might you use the extra tax money? This list is in order of what will give you the biggest bang for your buck:
- Repay credit card or other high-interest debt, by increasing your monthly payments by your tax cut. Let’s say you are repaying a $2000 debt at $50 a month on a card that charges 19.95 per cent interest. If you earn $50,000 your tax cut is $29.42. Add that to the monthly payments and your total interest will plunge from $1316 to $613, while your repayment time halves from 5 years 7 months to 2 years 9 months. To calculate your own numbers, use the Credit Card Calculator on www.sorted.org.nz.
- Join KiwiSaver. If you earn less than $14,000, your tax cut will be 2 per cent of your pay — exactly the amount you need to contribute to KiwiSaver. If you earn more, your tax cut will more than cover KiwiSaver contributions. At $30,000 you’ll pay $16.15 less tax a week, and $11.53 to KiwiSaver. At $60,000 you’ll pay $35.19 less tax and $23.07 to KiwiSaver. And at $90,000 you’ll pay $60.19 less tax and $34.62 to KiwiSaver. The scheme is a big wealth booster. To see roughly how much you might save in KiwiSaver, use the Quick KiwiSaver Calculator on www.sorted.org.nz.
- If you are already in KiwiSaver and have a mortgage, repay the mortgage faster. Say you are paying $1350 a month on a $200,000 25-year mortgage at 6.5 per cent. If you earn $70,000, your tax cut is $40.96. Add that to your mortgage payments, and you’ll pay $16,800 less in total interest and repay the loan 20 months earlier. That’s $16,800 more for retirement fun. The Quick Mortgages Calculator on www.sorted.org.nz will give you your savings.
- If you are in KiwiSaver and don’t have a mortgage, save more in KiwiSaver or elsewhere. Or, if you are saving enough, by all means spend the extra! Some people over-save.
The key to making this work is to put your plan into action the week you get the extra money. If you are planning to join KiwiSaver, decide now which provider and fund to invest in. See “Providers & schemes” on www.kiwisaver.govt.nz, and check fees on Sorted’s KiwiSaver Fees Calculator.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.