What's yours is mine and what’s mine is yours when you’re a couple, right? While this is likely to be the case in practice, many property professionals insist on one investing tip: Single-income couples should be keeping their finances strictly separate, especially from an investment point of view.
This doesn’t necessarily mean you need to have separate bank accounts and independent budgets. What it does mean is that you can structure your investments to make the most of tax rules and maximise your money.
There are a number of reasons why you and your family may find they are getting by on a single income. One partner could be taking some time out of the workforce because you are having children, or you could be taking time off to study. You may even be dealing with personal or medical issues that prevent you from working.
Whatever the reason, if it’s likely that your situation is going to remain the same with a single income status for at least the next few years, you may want to adopt some smart investment strategies to suit your situation.
Investing when on a single income:
Purchase in strategic names
For high-income earners, one of the most common and effective ways to invest in property is to negatively gear your investments, allowing you to obtain a tax refund. This in turn often makes the investment cash flow positive.
To best leverage a negatively geared investment, the property should be purchased in the name of the higher-income earning spouse, as they’ll be able to offset the full value of the ongoing tax deductions against their income tax.
Alternatively, if you’re buying a property that is cash-flow positive before tax – these are rare, but they do exist – then purchasing it solely in the name of the non-income earning spouse may be the better option, as they’ll pay zero tax on any earnings up to $18,000.
Consider investing in a family trust
By setting up a family trust and purchasing property in this entity, rather than in your own personal names, you could potentially shave a lot of money off your household tax bill. This is because distributions can go to lower-earning family members, including a non-earning spouse and children aged over 18 – as the trust does not pay tax, but the beneficiary does.
Note that when you use a family trust, you can not distribute a loss, so this type of ownership structure is not suitable for negatively geared properties.
Before deciding which buying structure to use, be sure you speak to your accountant or financial adviser for guidance on the best option for your specific situation.
Make sure you have income protection and life insurance
In my view, income protection insurance and life insurance is essential for every investor, as it is a form of risk protection against death or illness. But when you’re part of a single-income couple and you’re the sole breadwinner for your family, you simply can’t afford to be without income protection and life insurance.
Life insurance will pay out a lump sum to your partner if you die and ensure financial continuance for the rest of your family.
Income protection will cover you for up to 75 per cent of your regular income if you’re unable to work until retirement at age 65, which gives you the freedom and flexibility to recover and get treatment without being under financial pressure. There are cheap covers that only protect you for two years, and this is not enough.
Please note that none of the above strategies or tips are provided as financial or taxation advice, and are offered as suggestions for you to do your own research to assess their suitability for your situation.
You should always speak to your accountant to see how any financial decisions will impact your overall situation.