Tax effective investment in a low interest environment: what’s next for Melbourne investors

Old balance and orangesWith the cash rate kept on hold at a low 2.25% (RBA reports April 2015) and tipped to fall further in the coming months, those who are shy of investing need to consider their options. This low rate has led to a fall in interest rates on savings, term deposits and high interest accounts – with most now offering around 3%.

The big question is: how do you invest in a low interest environment? Having cash is great, but when that cash is now earning barely any interest, you need to start considering other options. You should contact your Financial Planner to discuss what options are suitable for you.

An investment in Australian shares is a great example of one of the options available. People often forget to factor in the tax considerations and inflation (rising cost of living) and how this will impact their overall outcome. In the year ending December 2014, the inflation rate was 1.7% making a big difference to the effectiveness of any type of investment.

This kind of investment is great for those who have cash saved for a home deposit, their retirement or in a Self-Managed Super Fund (SMSF).

Case study: Mary has $500,000 cash in savings:

If Mary puts this money in a term deposit for 12 months 2.95% with an Australian “big 4” bank it will earn $14,750 in interest and be taxed $5,752.50. Her total investment, after tax will grow to $508,997.80 barely keeping pace with inflation.

However, if Mary sought advice and had a well-diversified portfolio of high quality dividend yielding investments recommended by her Financial Planner, she could be in a different position. Investing in shares at an assumed dividend income of 4.55% and with franking credits to help out at tax time, Mary can expect to comfortably outpace inflation and see her investment grow to $519,201.

Generally, Mary’s investment in shares may also offer a capital growth return on average of 5% in addition to dividends. This means her investment could potentially go up by $25,000, bringing her total investment to $535,701. Capital gains tax, in this case, is not payable until the sale of investments.

Through a diverse portfolio of quality dividend yielding investments, Mary is able to grow her wealth exponentially. Not to mention that, as a long term investment, she now has an additional $35,000 to invest in order to earn a return on.

Contact an Endorphin Financial Planner today to discuss how investments in shares can make your cash savings work for you.

This case study is based on assumed figures. Please contact a financial planner to review your options and what is best for you.

Financial Advisor Phillip Richards

Phillip Richards is a qualified Financial Planner with more than seven years’ experience in the industry. His expertise in investment, debt management, retirement planning and insurance will help you assess your options to build your wealth. Contact Phillip today to discuss how you can build your own wealth and plan to reach your goals.

This information is general in nature and does not take your personal situation into account. If you are interested in taking control of your wealth, contact Endorphin Wealth Management.

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