For everyone Smart investing during tough times

  • By Geoff Allen
  • This article was published more than 1 year ago.
  • 4 Dec 2022

Recently, I was talking about the current state of financial markets to a friend who works as a teacher in a secondary college. She commented that some of her colleagues had scaled back or ceased their personal salary sacrifice contributions because recent market returns were so poor. They felt they were better off saving in their bank accounts. This attitude is understandable, but it is at odds with a sound financial savings strategy for several reasons.

Salary sacrifice contributions to superannuation have the immediate benefit of tax efficiency. These contributions are transferred to a super fund before normal tax rates on salary are applied. As they enter the super fund, they are taxed at 15%. If your tax rate on salary is 32.5% plus the Medicare Levy of 2% (a total of 34.5%) then you are saving 19.5% in tax for every salary sacrifice dollar. So, for example, if you salary sacrifice $5,000 a year, you save $975 in tax.

Keep in mind that the maximum amount that can be contributed to super and attract the 15% tax rate is $27,500 per annum and this includes the super paid by your employer. So, you can add to your employer’s contributions using salary sacrifice as long as you don’t exceed $27,500. By making regular contributions, regardless of the behaviour of financial markets, you take advantage of the savings principle of ‘dollar-cost averaging’. (This involves investing similar amounts at equal intervals to capture the highs and lows of asset pricing. Over time, it should lower your average purchase price.) 

For example, at the start of the year, a share cost $50. It now costs $40 due to market falls. This provides an opportunity. By purchasing now, you buy at a discounted rate and can buy more shares. When markets recover, the additional shares you have purchased provide added value. This is an illustration of how salary sacrificing in tough market conditions can deliver a real advantage. Ceasing salary sacrifice as markets fall is an opportunity lost.

Finally, long-term, regular savers also benefit from the principle of compound interest. Savings accumulate through additional contributions plus earnings. If earnings are reinvested, which is the case in superannuation, compound interest (interest on interest) can have a profound effect on an investment over longer periods of time. Time is your friend; impulse is your enemy.

This combination of tax savings, dollar-cost averaging and compound interest is a recipe for savings success. Don’t miss out!

Note: this article is in no way intended to provide you with personal advice and you should discuss your own financial circumstances with a qualified financial adviser before committing to any decision on matters raised in this article.

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