How will the budget affect millennials? It won’t…

Every year we hear about where our hard-earned dollars are being spent on our behalf in the federal budget and how Australia is tracking on an economic level, but is the budget relevant to us as millennials?

As a fellow millennial, I would go as far as to say the budget is pretty much irrelevant to us on a day to day basis, that is until we reach 2025 when our rate of tax is forecasted to change and become lower – amen to that! But, as most of us struggle to make a budget to stick to now, I highly doubt we’re going to spend our weekend financially modelling what the next 6 years of our taxes look like, but thanks Australia for the update.

Despite the current budget having very little impact on us, there are  a few key things you’ll want to read about if you want to understand where the world is going and how this affects your investing.

Set a budget

 Everyone needs a budget, and the people, governments and companies that plan their budgets well and stick to them are the ones that are more likely to reach their goals.

This year Australia talks about tightening the reigns and people living within their means – which is the most important part of successfully budgeting.

It’s good to know that this year the government is no longer using debt to cover everyday expenses and will also stop borrowing to cover the cost of needs-based school funding and cost-effective medicines, ensuring the longevity of the Medicare Benefits Scheme, so we get some dollars back at the doctor. No longer using debt to cover expenses is a habit every millennial should adopt if we want to have all the nice things we want and be able to actually afford them.

The fastest way to not reach your goals is to overspend, under-invest and live on credit which directly takes away your cash-flow.

Real wealth is created in the gap between your expenses and income, this gap is the “stuff it” money that you want, so you can have all the nice things you want!

To put this in perspective, this year has seen the lowest spending growth of any government over the last fifty years. 

Careful spending has assisted the reduction of debt in the budget and a 2-year plan to reach a surplus (savings). By being careful the government has saved a total of $41 billion since the last election. Once they’re out of debt, if they can continue saving billions per year, that’s a whole lot of “stuff it” money right there that can go towards improving quality of living, infrastructure and lowering taxes so there’s more money in your pocket and not just the governments.

Invest in the future

 The 2018 budget expresses that the government will continue to back Australian businesses to invest and create more jobs, remain internationally competitive and encourage forward thinking for the future.

Much like the government, you need to understand where the future is going and make sure you’re investing in assets that will remain relevant in the future.

Investing in business means the government keeps up with the rest of the world which attracts tourists and migrants that stimulate the economy. It also means that the more forward thinking our business ventures are as a nation, the more chance we have at fostering our own ‘unicorn’ companies like Facebook, that create jobs and creates a significant revenue stream for the government through personal income tax, company tax and GST on purchases.

The government is also looking to back our farmers and the conservation of the Great Barrier Reef, as produce and animal exports are a significant income stream for the government as is the revenue generated through tourism.

Look at Micro and Macro themes

 Despite learning the meanings of these words at school, they can be a little challenging to understand if finance isn’t a natural skill, or if you were like me and probably skipped that class… Oops!

Micro themes look at local things that are happening, whereas macro themes look at things that are happening on a global scale. Understanding these will help you to invest in the future.

Locally, Australia is moving into its 27th year of consecutive growth

Which basically means life is good down under and we’re on the right track to be making a profit. Much like investing personally, the mining boom has come to an end, so Australia has to shift its investment focus to other areas that will continue to grow in value over the short and longer term.

Part of why business is an investment choice for the government is that businesses are thriving and the ABS (Australian Bureau of Statistics) has shown 16 consecutive months of jobs growth leading into January of this year. To put this in perspective, more than 1,000 jobs were created each day over the past 12 months.

The economy is also expected to have grown by 2.75% by the end of the financial year in June 2018 and is expected to grow by 3% by the end of June in 2019 and again by the end of June in 2020.

Globally, investment market performance has become more synchronised as technology connects the world. In turn, this means GDP growth across the world is also becoming more synchronised.

Australia is a highly-desired place for real estate investment, tourism and exports, particularly through our strong links with Asia.

You may have heard recently about the Trade War between the USA and Asia. Trump’s move to increase taxes on imports is more commonly referred to as Protectionism which is a government policy that makes local products cheaper than outsourced products. The aim is to help support local business and stimulate the economy through local spending and localised taxation. When there are more imports than exports it means more money is leaving the country than coming into it.

In Australia, we typically export more than we import so we’re making more money sending our products offshore than we are placing taxes on imports, meaning we shift our citizen spending back onshore.

This brings us to the next point.

Track your Return on Investment

Like any good investment or savings plan you want to see that your investment is growing and you’re reducing debt, which is just as important as building wealth.

The careful spending and debt reduction by the government will see the budget deficit (meaning the debt) reduce to 0.8% of our GDP (Gross Domestic Product aka our country valuation in business terms) by the end of June 2019. With the current financial projections and budget, the government expects to reach a surplus (profit) of 0.8% of our GDP by June 30th 2022.

Sometimes debt is unavoidable, so it’s important to pay it down as fast as possible and invest in assets that will provide a return on your investment to help you build wealth and have the funds available when you need them most.

Gain your freedom

When you follow the above steps and you start increasing the gap between your expenses and your income, it means you can reinvest your profits or surplus funds to build wealth. You will have the freedom to buy and enjoy more of the things you really want while having the financial security to do so.

In the government’s case, their strategy is to re-invest in more infrastructure to reduce congestion and more importantly, it means being able to reduce the tax rates for the majority of people.  

The more money the government has from wisely budgeting, spending and investing, the less money it needs to take from you in taxes to be able to support the economy. When the government has more money in their pockets, it means you do to.

If you’re keen to financially model the next 6 years of your taxes here’s the key thing to know. The majority of people, being 53%, are paying 32.5% tax on their income. By June 30th 2025 they plan to increase this so that 73% of people paying 32.5% as their tax rate. The government is also changing the threshold so that if you earn between $41,001 – $200,000 per year you will only pay 32.5%. This is in comparison to the current threshold where you pay 32.5% if you earn between $37,001 -$87,000, 37% if you earn $87,001-$180,000 and 45% if you earn over $180,000.

A snapshot of the changes:

With population growth, these percentages would be as follows:

To recap:

Although the federal budget isn’t relevant to us on a daily basis, the principles behind the budget are. If you’re the government or a millennial building wealth, the only steps that are relevant to reaching your financial goals are:

  1. Set a budget
  2. Invest in the future
  3. Look at micro and macro themes
  4. Track your ROI (Return on Investment)
  5. Gain your freedom

Let’s face it, the government hasn’t always been the best with their money so if they can save billions per year, then there’s hope for us millennials yet.