Setting a budget to manage your tax

No one wants a tax bill but if you’re a casual worker, a contractor or working under a service facility agreement, there is a chance you could end up with one.

  5 minutes

If you’re in the habit of putting all your money into your bank account and putting your tax return low on your to do list, it can be a quite a surprise when you end up with a tax bill at the end of the year.

That’s not a problem if you have made a detailed budget, stuck to it religiously, and have a chunk of cash saved up for a rainy day.

The problem is, not many of us have cash stacked away as sticking to a budget is difficult. It’s also a bit depressing when it comes to the end of the month, you’ve been working really hard, and you want to treat yourself to a night out on the town or a new outfit. However, there are still ways to save without sweating every time you buy a cup of coffee or feeling guilty about the occasional night out.

This is how you do it.

Making savings hassle-free

We have used ideas from ASIC on the MoneySmart website, and by Scott Pape of The Barefoot Investor and summarised so it is easy for you to follow. They’re a way of making saving and budgeting as easy and hassle-free as possible.

The first thing we suggest is to take one night out of your life and to work out your living expenses, including your rent. This isn’t special-occasion expenses—just things like your rent, your regular bills, and your daily spending money such as coffee and lunch.

Ideally, you want the number at the bottom of this column to be 60 per cent of your take-home pay.

Then you start by setting up a low-fee everyday bank account (such as the BOQ Specialist Everyday Plus Account). Most people already have a day-to-day savings account. For most of us, that’s where our interaction with the bank stops -but not for you.

Keeping a backup for tax

Step two is to set up another two bank accounts. With these accounts, you might look for something that pays a bit more interest (such as the BOQ Specialist One Account, for example or a 32 day notice account). If you were to do this, you could set up an automatic deduction for 20 per cent of your salary to go from your everyday savings into each of these two accounts.

One of these accounts will be for treating yourself—maybe for a holiday, or a new outfit, or a night on the town (or two). Just make sure that with this account, you can access your money straight away without penalty.

The other one will be your ‘fire extinguisher’—the account you point at a bill such as a tax bill. A 32 day notice account pays a higher variable interest rate, but you can’t access the funds in it immediately – that’s the good thing! That way you don’t think about it, don’t access it until you need it—and don’t spend the money in there on something you don’t need.

So day-to-day, you live on the money in your everyday account. Pay your bills, buy your lunch, and don’t worry about it running down. When you want to treat yourself, whip out your debit card attached to your account for treating yourself. And when the tax bill arrives at the end of the year, you’ve got it well and truly covered in your ‘fire extinguisher’ account.

Other savings

That sounds great, you say, but what if I’m already trying to save up for a home deposit? I won’t have any money left.

Well, not necessarily—there are options for that too. There’s a great new scheme set up by the government called the first home super saver (FHSS) scheme. It was designed to help first home buyers save for a home deposit using their super fund.

The way it works is you can make voluntary super contributions above and beyond your normal super. Each year, you can save up to $15 000 in your super. The most you can save in the scheme is $30 000 over a three-year period. As of July 2018, you can start withdrawing those savings to pay for a deposit of your dream home. Or your first dream home.

It’s a really good, tax-effective way of putting aside a few extra bucks in savings in a way that you don’t have to think about.

The whole idea of setting up a budget is not to make life miserable. It’s to make life easy. By setting up some structures around your finances, it’s easy to save the money you need to save without stress.

Then if/when the tax bill comes, you’ve got it sorted.

Ready to set up a low-fee account to help you manage your money? Our One Account or our Everyday Plus account might be right for you. Or contact us on 1300 131 141 to find out how we can tailor a finance solution for you.