So is that time of the year again and the council rate letter just arrived...Damn you Len Brown....
This is the new council rates for this year so you have an option to pay full rate once with a small discount (0.91% in my case) or pay by 4 installments. So it got me thinking, when it make sense to pay up front and when should I pay by 4 installments.
In my bill, the full payment is $2502.50 and you can pay $631.37 every 3 months.
Let's assume I have the cash to do either, so my cash will be 631.37 x 4 = $2525.48 and ,your options will be:
I've list a couple basic investment options and their rate of return.
Online saving account: 0.75% less tax
Serious Saver account: 2.75% less tax
12 months term deposit: 3.1% less tax
Offset Home loan: 5.75%
Stock market: ~9% less tax + fees
I've make an excel file to calculate the ending value by changing the rate of return and find out the breakeven point.
TLDR: Basically, if your rate of return is anywhere over 2.94% p.a. you should pay by installments. Otherwise, you will be better off pay it up front.
Feel free to make a copy and play around. (Graphs not included)
https://docs.google.com/spreadsheets/d/1zs_lRlzvXuI03GmRjISg_deG4DLe-EGxmytDRA3eK20/edit?usp=sharing
EDIT: Typo
This is the new council rates for this year so you have an option to pay full rate once with a small discount (0.91% in my case) or pay by 4 installments. So it got me thinking, when it make sense to pay up front and when should I pay by 4 installments.
In my bill, the full payment is $2502.50 and you can pay $631.37 every 3 months.
Let's assume I have the cash to do either, so my cash will be 631.37 x 4 = $2525.48 and ,your options will be:
- Pay the bill in full (2525.48-2502.50)=$22.98 and put the rest of the money into investment (or part of the investment)
- Pay by 4 installments every 3 months (2525.48-631.37)=1894.11, make another payment every 3 months. Put the money you have on hand into investment and draw it out when you need to pay.
I've list a couple basic investment options and their rate of return.
Online saving account: 0.75% less tax
Serious Saver account: 2.75% less tax
12 months term deposit: 3.1% less tax
Offset Home loan: 5.75%
Stock market: ~9% less tax + fees
I've make an excel file to calculate the ending value by changing the rate of return and find out the breakeven point.
TLDR: Basically, if your rate of return is anywhere over 2.94% p.a. you should pay by installments. Otherwise, you will be better off pay it up front.
Feel free to make a copy and play around. (Graphs not included)
https://docs.google.com/spreadsheets/d/1zs_lRlzvXuI03GmRjISg_deG4DLe-EGxmytDRA3eK20/edit?usp=sharing
EDIT: Typo