8 things you can do with your surplus cash flow or savings

If your household’s income exceeds your annual expenses, you may have built up surplus cash.

There are typically eight applications of this surplus cash that an individual or household might consider.

These include:

Debt repayment

1) Non-deductible debt repayment

The repayment of non-deductible debt is often a top priority for most households, with a focus on paying down their home loan, any personal loans or outstanding credit card balances.

2) Deductible (geared) debt repayment

Repayment of geared debt involves paying down a tax-deductible loan, such as an investment property loan or a loan attached to a share portfolio.

Given the tax deduction associated with servicing an investment loan, it is often worth thinking about whether you should repay deductible debt.

One reason for many people to avoid paying down their deductible debt is that there can often be a better use for your money.

Obviously, this will depend on what interest rate you’re actually paying on your deductible debt. If we assume the interest rate is something close to a current home loan rate, then repaying the debt might not give you the best return on your money.

Non-superannuation investment programs

3) Direct ungeared investment (e.g. shares, property, bonds)

Surplus cash can be put towards investing directly into defensive investment options (e.g. at-call accounts, term deposits, fixed interest) and/or growth assets (shares, bonds, property, currency).

4) Geared investment – property

Surplus cash could be used to support a geared investment program into property, such as the purchase of an investment property.

For a person considering a geared investment (either property or shares) it is advised that they allow for a medium-to-long time frame. A typically recommended time frame for someone considering the purchase of an investment property is a minimum of five years, but preferably seven to 10 years. This is due to the fact that buying an investment property involves substantial upfront and ongoing expenses, as well as exit costs.

Depending upon a person’s experience and time frame, it can be worthwhile discussing the purchase of an investment property with an expert or engaging a buyer’s advocate. Buyer’s advocates are licensed professionals that specialise in searching, evaluating and negotiating the purchase of property on behalf of the buyer.

5) Geared investment – equities

Surplus funds can be used to support a geared investment program into shares in a number of different ways.

They could be used to service an investment loan that is secured against a person’s home, with the investment loan then used to invest into a portfolio of shares with the interest costs of the investment loan, and other costs associated with the investment able to be claimed as a tax deduction.

Funds could be used to invest into a share portfolio as part of a margin loan. A margin loan is when an individual borrows funds from a broker with the loan (or funds available for lending by the broker) being based on the LVR (loan to value ratio) of your total share or managed fund portfolio.

Given some of the tax implications associated with geared investment programs (interest on loans, depreciation, franking credits, capital gains, etc) it is recommended that a person considers using a registered tax agent to ensure they obtain the best tax outcome.

Superannuation programs

There are two methods of contributing funds to superannuation: post-tax (e.g. non-concessional contributions) or pre-tax (e.g. concessional contributions).

6) Concessional (pre-tax) superannuation contributions

A person could make concessional (pre-tax) superannuation contributions with some of their surplus cash. Concessional contributions are made pre-tax and are subject to the 15 per cent contributions tax.

For funds that are going to be used for retirement anyway, this is often much less than an individual’s marginal tax rate, providing a tax saving on funds that are contributed to superannuation.

The maximum amount that can be contributed to superannuation in a financial year and be deductible to the contributor (be that the individual or employer) is $27,500 (for the 2021-22 financial year).

7) Non-concessional (after-tax) superannuation contributions

Non-concessional contributions are not subject to the 15 per cent contributions tax and are completely tax free upon withdrawal.

The annual non-concessional contributions cap is $110,000 (for the 2021-22 financial year).

A three-year averaging rule exists, whereby a member can make a non-concessional contribution of $330,000 in any one year (e.g. they can use their $110,000 cap for the current year and bring forward the next two financial years).

Lifestyle

8) Lifestyle expenditure

You can always spend your surplus cash on your lifestyle, whether this involves buying a new Louis Vuitton or Hermes handbag, a set of golf clubs, or enjoying an overseas holiday.

Need investment advice?

Before deciding on where to direct your surplus cashflow or planning the next phase of your wealth creation, it’s worthwhile speaking with a financial adviser to ensure that you are on the right track.

It’s also prudent to speak with an accountant to ensure you have all of the important and relevant details. Getting the right advice and making the best decisions is key to maximising your wealth potential.

To find out more, give us a call on (03) 9875 2900 or send us details via the contact form below.