The new financial year often brings welcome news of a promotion or salary increase but with the rise in the cost of living it’s very easy for this extra cashflow to be whittled away by lifestyle creep.
Lifestyle creep is the gradual increase in spending as income rises. While this subtle uptick in expenditure may seem harmless, it can quietly erode wealth, especially when compounded over time, and delay achieving financial independence.
For generation X, those aged between 45 and 60, lifestyle creep can be particularly damaging as this group’s peak earning years tend to coincide with high expenses, like children’s private schooling, home upgrades and lifestyle inflation. Making it even more important for this generation to get ahead with their wealth planning and take advantage of surplus cashflow.
Here are some tips to start off the financial year and make the most of extra cashflow:
Set financial intentions
Start with the end in mind and decide on what your ideal financial position would look like by the end of the 2026 financial year. How much extra will you repay on your mortgage? Will you make extra contributions to superannuation? How much extra would you like to have invested?
Set a disciplined plan for the extra cashflow and make it automated
Repay non-deductible debt such as buy now pay later accounts, credit cards or personal loans as a priority. Next focus on extra mortgage repayments.
If the mortgage is under control and represents less than 50% of the home value, consider building superannuation or investment wealth.
Boost superannuation, with extra concessional (deductible) contributions. This is a very effective way to build long-term wealth, due to the significant personal tax savings.
For instance, for person earning a salary of $140,000 an extra concessional (deductible) contribution of $10,000 could lead to a personal tax saving of $3,550 which is a return of 36%.
Extra contributions can be made via salary sacrifice or a personal contribution to super. Bear in mind that access to super is restricted until at least age 60, so this cash would be locked away. High income earners should also consider if Division 293 tax may apply.
Build an investment portfolio, through regular and automated monthly investments. If access to the money is needed within 3 years, consider secure investments like a high interest savings account. Those with a longer investment time frame of 5 years or more could consider investing in growth style assets like shares and managed funds. Having a longer timeframe, allows the portfolio to ride out any market volatility. Exchange traded funds (ETF’s) or managed funds can be a good option to gradually build investment wealth in a diversified way.
Building an investment portfolio can also be a great strategy once the home mortgage is repaid. Repaying the home mortgage is a milestone on the wealth building journey and often leads to concern over what to do with the extra cashflow each month. Instead of upgrading the home or purchasing another lifestyle property such as a holiday home, consider a regular investment into more liquid assets like shares or managed funds.
Making regular deposits is an effective way to build wealth over-time. For example, an investment of $5,000 per month could grow to $776,411 after 10 years assuming a return of 5% pa.
Before starting an investment, seek advice on the most effective ownership structure.
Don’t let your wealth be whittled away as your income increases. Set a plan and take a disciplined approach to increased cash flow by focusing on debt repayment, building super or more accessible investment wealth. It is surprising how quickly a regular and automated approach can speed up the journey to financial independence.
Lindzi Caputo of HLB Mann Judd Wealth Management (NSW) Pty Ltd (AFSL 526052). This content contains general advice which does not consider your particular circumstances. You should seek advice from HLB Mann Judd Wealth Management (NSW) who can consider if the strategies and products are right for you. Information based on historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.