Last week I shared my philosophy on how to get a little bit richer everyday.
Today I want to talk about a smart way to save your money and pay less tax by putting extra money into your superannuation.
Okay, I can feel you roll your eyes at me. “Super is for old people to worry about” or “Who cares? It’ll be 40 years until I can access it”.
Now I know it can be a stretch to even think about your super when you are madly trying to scrounge together enough money for a house deposit, or putting all your hard earned into your next big overseas trip. But pay a little attention to your super now and it could have massive benefits later on.
Let’s look at the numbers. A 30 year old on a salary of $60,000 with a balance of $25,000 in super could expect to have around $424,618 at age 65. But someone salary sacrificing an extra $50 per week into super could expect to have $560,559 when they retire. That’s over $136,000 extra.
That’d add up to a pretty nice luxury cruise with your mates where you can reminisce about the days when Facebook was cool.
Okay so how does it work?
The Magic of Compound Interest
Einstein called compound interest magic, but it’s not really (I mean, what would he know?). It’s just the basic idea that the longer you have money saved, the bigger it grows.
Putting extra money into superannuation when you’re young means that your money has a longer chance to grow. And the sooner you start, the more time your money has to build into a decent retirement nest egg.
Salary Sacrificing Your Pre-Tax Dollars
With all these baby boomers on the peak of retiring, the government has basically figured out that they can’t afford to fund people’s retirement anymore. The pension only stretches so far, and for our generation it’s probably going to be a pretty small payment.
Because of this, the government has tried to make putting money into super as attractive as possible. They do this by taxing super contributions and earnings at a much lower rate than most people’s marginal tax rate.
Salary sacrificing is basically a way to invest your pre-tax dollars in super. Contributions made to super are only taxed at 15%, and you reduce the amount of tax paid on your earnings at the same time.
Even putting away $50 a fortnight can help boost your super and reduce the amount of tax you pay, putting you further ahead than if you’d just taken your full payment as after-tax salary then invested it.
If you want to see exactly how your income would be affected you can use this calculator. Play around with the figures and see what salary sacrifice contribution would work for you.
I figured out that $170 in pre-tax contributions a fortnight, only reduced my take home pay by $130. And because that $170 is taxed at 15%, it means more money for me overall.
Government Co-contribution Helps You Grow Your Super
People on a lower salary can also take advantage of the government’s co-contribution scheme for super. Basically, for every dollar you put in up to $1,000, the government will contribute up to 50 cents. It works on a sliding scale and currently cuts out for people earning over $48,516. That’s free money people!
This is also a great option for people who are not working at all – say if you are taking time off to care for the kiddies or travelling long term. With no employer putting money in for you, it’s important to keep up those contributions so you aren’t stuck at home watching Friends re-runs when you’re 72.
Have you got any other ideas on how to grow your super? Could you find an extra $1,000 a year to contribute to your super fund?
Image source: Simon Q/Flickr
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