Cash flow management and tax-smart strategies for millennials

As a millennial, it might feel like you’ve been dealt a difficult hand in life. Student loans hang over your head, the cost of living keeps climbing, and it becomes more expensive to buy a home with every passing year.

To help out, we’ve put together some simple tips to get on top of your cash flow and reduce your annual tax bill. Whether you’re just getting started in your professional career, or you’re midway through and want to make the most of your peak earning years, these strategies can help you achieve your long-term financial goals a lot sooner than you think.

A common misconception about tax planning

Many millennials think tax planning is something rich people do to escape their obligations. But tax planning isn’t about dodging taxes; it’s about optimising your financial strategy within the legal framework.

Let’s say, for example, you’re a 28-year-old graphic designer with no background in financial planning. You’re earning a full-time income and are starting to make more money than you ever have. If you overlook tax planning, you’ll potentially pay hundreds or even thousands of dollars a year more in tax than you have to. Wouldn’t you rather spend that money on a holiday, or put it towards a home deposit, than give it to the government?

Thoughtful tax planning stops you from leaving money on the table. You can use the money you save to achieve your financial goals and secure a more stable future instead.

What is cash flow management and why is it important?

An important part of financial and tax planning is cash flow management. Put simply, cash flow management is the process of monitoring and optimising the movement of money in and out of your bank account.

Managing your cash flow is so crucial because it gives you an idea of how much money you’re spending, and where you’re spending it. If you reach the end of the month and find you’re low on cash, you’ll be able to tell where it went. Of course, if you’re smart, you’ll set a budget to prevent this from ever happening!

Tips for setting a realistic budget

The best piece of financial advice you can receive early in your career is to set a budget. It may sound boring and tedious, but creating a budget is a lot easier than you think.

To set up a budget, start by making a list of all your sources of income. For most people, this will be your salary, but you might also earn money from other sources of income such as freelance work.

Next, categorise your expenses into fixed costs, such as rent or mortgage payments, and variable expenses like groceries and entertainment. Allocate specific amounts to each category, ensuring that your total expenses do not exceed your total income!

Other tips when creating a budget:

• Make regular deposits into a savings account which you only use for long-term goals such as a car or house
  
• Create another separate bank for emergencies, such as unexpected medical expenses, and make regular deposits
  
• Use budgeting apps or spreadsheets that make it easier to track your income and expenses
  
• Minimise debt by paying off high-interest loans such as credit cards first
  
• Look for ways to reduce your fixed costs such as bills by comparing providers and shopping for a better rate.
  
  

Tax-smart strategies for millennials

Setting a budget and tracking your income and expenses will make your life easier at the end of the financial year. You’ll understand how much money you’ve earned, how much you’ve spent and what you’ve spent it on. However, there are other strategies you can use to save more money at tax time.

Here are some tips to reduce your annual tax bill:

• Claim eligible deductions. Even if you’re early in your career and only work part-time, you should get into the habit of claiming eligible deductions from your job. This includes work-related expenses such as uniforms, professional development courses, or home office expenses if you work from home. Keeping records of these expenses will make it easy to maximise your deductions and minimise your taxable income.
  
• Use your superannuation wisely. Any voluntary contributions you make to your superannuation will be taxed at 15% (up to $27,500), instead of your marginal tax rate. So putting extra income into your super can give your retirement savings a quick boost and save you money at tax time. For the contributions to be deductible, you’ll need to fill out a notice of intent to claim form before the end of the financial year.
  
• Explore first homebuyer benefits. If you’re saving for your first home, you can explore government incentives and grants available to first-time homebuyers. One such scheme is the First Home Super Saver Scheme (FHSS). The FHSS allows you to save money for your first home in your super fund, either by making voluntary contributions from your income or by entering into a salary sacrifice arrangement with your employer.
  
• Get professional advice. While educating yourself about tax planning can give you solid foundational knowledge, professional help will ensure you don’t miss important details. Tax accountants possess in-depth knowledge of tax laws, ensuring that your returns are accurate and optimised for potential savings. You may also want to involve a financial advisor to discuss a big-picture strategy and look at ways to grow your long-term wealth.

   

If you’d like help managing your finances, organising your budget or growing your long-term wealth, Poole Advisory can help! Get in touch today or book an appointment to discuss your current situation and we’ll create a plan to achieve your financial goals.

Compliance Disclaimer:

This information contains general advice only, that is, advice which does not take into account your needs, objectives, or financial situation. You need to consider the appropriateness of that general advice in light of your personal circumstances before acting on the advice. You should obtain and consider the Product Disclosure Statement for any product discussed before making a decision to acquire that product. You should obtain financial or credit advice that addresses your specific needs and situation before making investment or borrowing decisions. Taxation information is based on our interpretation of the relevant laws as at 1 July 2018. While every care has been taken in the preparation of this information, Prosperitas Partners Pty Ltd does not guarantee the accuracy or completeness of the information. The case studies are hypothetical, for illustration purposes only and are not based on actual returns

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