I was researching on investments and how to invest etc (and a big shout out to Andrea over @ Nickel by Nickel for this post on investment basics) and I discovered something. Something I didn’t even know existed.
We have in Australia something called the “First Home Saver Account” introduced in 2008. And while it doesn’t seem a very popular product (my current bank doesn’t have it, and it seems to only be really popular with Building Societys and Credit Unions), reading the benefits for opening one, it seems like a brilliant idea for somewhere to put extra money into.
Essentially, it is an account which you put money into if youre saving for your first home and ONLY for buying your first home. You cannot access the account for any other expenses. There is also a minimum of 4 years, that you have to keep the account open and make at least $1000 worth of contributions. There is also a capped amount you are able to contribute.
So in essence it’s like a term deposit. It’s the benefits that makes it a far better option, if you are planning to buy your first home.
First of all you do not have to declare ANY earnings you receive (i.e. interest received) to the government. Compared to a normal term deposit in which any earnings you receive counts toward your gross income and therefore increases your tax. Also earnings made by your account are taxed at only 15%, BUT this tax is payed by the account provider.
Second, the government will contribute an amount equal to 17% up to a maximum of $935 for every dollar you put into your account.
Third and while your contributions are capped to a maximum amount for the life of the account (currently at $85,000, but is indexed at $5000 increments every financial year) your earnings are not. Therefore once you reach the limit of contributions, your account still grows with the interest you earn.
The best scenario would be to therefore, try to get within $10,000 – $15,000 of the lifetime cap as soon as possible, and then make smaller contributions for the remainder of time you need the account open. Allowing you to take advantage of the government contribution to grow your account rather than relying on interest alone. But that’s just how I see it, I could be wrong, and please feel free to blow huge chunks into my argument if you feel like I’m talking out of my ass.
This would be a great idea for me, since I have absolutely no plans on being a homeowner until well into my 40’s (the notion of being tied down by a mortgage… *shudder*).
And a great way to use up excess funds and NOT be taxed extra by the government.