Should you use your tax cut to invest in stocks? And how should you go about it?

Should you use your tax cut to invest in stocks? With another unexpected round of tax cuts starting from the middle of next year, unveiled in the federal budget earlier this week, this is a question facing many. This round isn’t that large – only $536 a year and little over $10 a week by 2027. And they may not even last if the Coalition win the election…although a hung parliament run by the teals could some tax changes if they live up their words in recent months.

But let’s assume for now that these tax cuts are in place. This round, and the ‘Stage 3’ cuts implemented this financial year will lead to the average Australian having an extra $2548 by 2027. This prospect (or even imagining hypothetical indexing the tax brackets to inflation under a hung parliament with the teals holding the balance over power) leaves the question of how to use your money. Should you save it? Should you pay down debt? Should you ‘lifestyle creep’? Or perhaps should you invest it? They’re all options. If you choose the latter option, how to invest it? Investing in stocks is an option and here’s how you can.

How to use your tax cut to invest in stocks?

Can’t you just buy stocks directly through your broker? You can. Although if you’re only investing your tax cut, you may not have much to invest in that many individual companies unless you invest very small amounts in each.

In such an instance, you won’t derive that much upside unless the stock goes up an exponential number of times, nor the benefit of significant dividends. But if you put all your eggs in one basket, you risk losing it all.

But there may well be a couple of options for you. One such option could be ETFs (Exchange-Traded Funds). You’re effectively investing in a basket of assets such as stocks, bonds, or commodities and you’re buying it on a stock exchange just like any other company.

In other words, it is like having your money invested by professional fund managers, but instead of handing all the money to them and leaving it at the mercy of the fundies, you just buy and sell shares in the ETF and have exposure to a broad portfolio of stocks. A kind of DIY portfolio. Of course, keep in mind you’re not getting the personalised advice you’d be getting from a broker as well as potential management fees and the volatility and market fluctuations that come with any other stock.

Another option could be microinvesting – in our view, a great option for those who want to start investing but don’t have a lot of capital.

Microinvesting is a form of investing that allows you to purchase fractional shares of stocks with as little as $1. Instead of having to buy full shares, which can be expensive and require large amounts of money upfront, microinvesting lets you invest smaller amounts and build your portfolio over time.

When you purchase fractional shares, they are pooled together with other investors’ money and invested in the same stocks that full shares would be. This means that you benefit from the same gains as those who have purchased full shares.

The great thing about microinvesting is that it allows for diversification without a lot of upfront capital. With just a few dollars, you can invest into a variety of different stocks and build your portfolio over time. You’ll also have access to the same research tools and data that traditional investors use. It can be an effective approach for those who want to learn the basics of stock market investing and gain experience with smaller investments first before transitioning into larger investments.

There are several platforms including:

• Raiz Invest
• Spaceship Voyager
• CommSec Pocket
• Sharesies
• Blossom
• Pearler
• Stake
• Douugh

Conclusion

There are plenty of ways you could use your tax cut when it kicks in, one of which could be investing in stocks. And even if you only receive a small amount, there are ways you can still have ‘a slice’ of the action in markets.

Any investment advice given in this article is general only, and does not take account of your individual circumstances. 

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