One of the most common new year’s financial resolutions is “spend less and save more.”   

We all know that making regular contributions into an investment works. That’s the magic of compound returns. Indeed, Albert Einstein is said to have described compound interest as the most powerful force in the universe, and the eighth wonder of the world. “He who understands it, earns it; he who doesn’t, pays it,” said the scientist. Compound returns enables investors to earn returns on their returns, effectively meaning that money is working on the investors’ behalf. With the optimism that fuelled many new year resolutions now being replaced by the return to daily grind, how can you harness the power of compound returns to achieve your savings goals?  

Finding a tax-effective, simple and flexible vehicle that allows you to contribute regularly and doesn’t create endless paperwork for you or your financial adviser is a vital step in establishing a good savings discipline. 

Five steps to spend less and save more
Kick-starting your savings resolution can be as simple as following the maxim: “spend less, save more.” However, we know that setting up this discipline can be a challenge, and research shows it can take 66 days to form a habit.

However, harnessing your goals can be achieved by following five steps:  

1. Set a savings goal;
2. Keep track of your spending: write down how much you have spent at the end of each day. At the end of each week add up how much you’ve spent in total;
3. Identify where you can make savings (for example, cutting down on bought lunches and takeaway coffees), and use these funds to start a regular savings plan;
4. Invest the funds. Your investment should be in line with your risk profile. Set up periodic payments or direct debits from your bank to make sure you stick to the plan;
5. Monitor the results of your investments on a regular basis: monthly, quarterly and six-monthly. Over time you may be amazed at how much you have saved.

A new year’s investment resolution you can make

Just as important as finding a simple option that allows you to contribute regularly is finding a tax-effective vehicle.

One long-term investment plan that may help you implement a savings discipline, harness the power of compound interest, and be tax-effective, is the humble investment bond.

The investment bond in practice: flexibility and tax-effectiveness

Investment bonds operate like a tax-paid managed fund. Your funds are invested in an underlying portfolio of assets and, like a managed fund, you can choose from range of options, such as equities, fixed interest, real estate or a mixture of each, depending on your investment horizon and goals.  

When you set-up an investment bond you can invest as much as you like (or as little as $500), and you can then contribute more each year, up to 125% of the previous year’s contribution. These contributions can be made regularly and automatically by direct debit, so you don’t need to exercise too much self-control to keep the investment discipline alive.

All returns from the underlying investment portfolio are taxed at the company rate of 30% and reinvested in the bond. They are not distributed to you, and you therefore do not need to declare the bond as part of your personal tax return. In addition, if your underlying portfolio contains equities which pay franked dividends, the actual tax you pay on returns could be lower than 30%.

Because all proceeds are reinvested in the bond and not distributed, reinvestment dates do not need to be tracked for capital gains purposes, and you can also switch between investment options without triggering capital gains tax.

If you hold the bond for 10 years, all proceeds are distributed to you tax-free, and do not need to be declared as part of your personal tax return.  Proceeds can be given to you as a lump-sum, or in regular payments, all tax-free.

Estate planning

Investment bonds can also be used effectively in estate-planning, or to gift money outside of an estate or will.

An investment bond is in fact an insurance policy with a life insured and a beneficiary and it does not form part of your estate. This means that it may provide greater simplicity and control over death benefits than other investment products, such as unit trusts, shares or term deposits. The death benefit from an investment bond is directed to the nominated beneficiary, and this beneficiary receives the benefit tax-free, regardless of how long the investment has been held. 

In addition, because the investment bond does not form part of an estate, it cannot be disputed and/or caught up in lengthy legal processes. Investment bonds may also offer protection from creditors in the case of bankruptcy.

Super charge your new year’s saving goal

It’s always satisfying to start at the beginning – so why not start at the beginning of 2018 and head towards your investment goal. But be careful – don’t sabotage your efforts by choosing a less-than-effective savings plan which can make you feel like it’s all too hard. Saving consistently is tough enough as it is, but with the right set-up you can make this one resolution you can keep.   

Disclaimer: Suitability of a Centuria Investment Bond will depend on a person’s circumstances, financial objectives and needs, none of which have been taken into consideration in preparing this whitepaper. Prospective investors should obtain and read a copy of the Product Disclosure Statement (PDS) for any investment bond and consider the information in the PDS in light of their circumstances, objectives and needs before making a decision to invest. This document is not an offer to invest in any of Centuria’s Investment Bonds. An investment in any of Centuria’s Investment Bonds is subject to risk as detailed in the PDS. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230867