How do we split our money each paycheque?

For some people, this is going to be irrelevant, but if you’re in the process of building or reviewing your personal budget then our own example may help.

Because we have a mortgage offset account, we’re incentivised to keep all our excess cash in one place. So over the years, we’ve built our own spreadsheet budget that splits our cash into a series of ‘mini accounts’. Way back in the day, we used to physically do this with envelopes – withdrawing money each payday, and putting some cash aside for car servicing, holidays, and so on.

Now it’s entirely digital, earning us the equivalent of 6%pa while it waits to be spent. Every month we review our expenses, and our monthly spreadsheet automatically sends our money into these categories as follows:

  • Investment 8.5%
  • Baby [IVF] 11.5%
  • Beauty 1.0%
  • Medical 6.6%
  • Car 1.7%
  • Car Buying 2.8%
  • Clothes 1.0%
  • Gifts 1.1%
  • Holidays 6.3%
  • House 36.0%
  • Investment Property 13.4%
  • Groceries 4.8%
  • Entertainment 2.8%
  • Transport 1.9%
  • Cash Buffer 0.7%

We’re about to sign off on our 2018 Budget (bit behind schedule because we took our Christmas holidays in Jan/Feb). I’m always hoping to push ‘Investments’ up; we also need to ramp up our Holiday budget as there’s an extended trip on the cards for the next year or two. Baby can come down – not because anything much has changed in that regard, except we’ve built up about $10,000 in that ‘mini account’ by not doing as much IVF in 2017 so we can spend that down for a while.

The great thing about the mortgage offset is things like ‘Car Buying’ (where we put money away each week so we have the option to buy our next car in cash) are being put to good use while they’re sitting there as cash.

I sometimes get asked how our mortgage offset earns us the equivalent of 6%pa on our spare cash. It’s based on the rules of the Australian tax system. Using round numbers, let’s say your home loan interest rate is 4% and you’re in the 32.5% tax bracket meaning you pay about one-third of your extra income as income tax.

Having $10,000 in your offset account would save you $400 a year (4%), and that’s tax free because you don’t get taxed on savings. You would have to invest that $10,000 at 6%pa in order to end up with the same $400 in your pocket – $10,000 @ 6% would earn you $600, but you’d pay one-third of that ($200) in tax.

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