How I plan to invest my tax cuts

I have big plans for my tax cut cash this year.

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The recent Federal Budget contained some good economic news for almost all Australians. From 1 July, every single income taxpayer's tax rate is set to fall.

These tax cuts will mean that come the new financial year, everyone who earns income above the tax-free threshold of $18,200 per annum will have fewer dollars taken away by the taxman every paycheque.

Chances are that most people won't really notice these tax changes. After all, we tend not to miss what we don't have. But we also tend to adjust to what we do have fairly easily. But I'm going to be making an effort to redirect the extra dollars I'll be getting from these tax cuts into investments in ASX shares.

I think investing in ASX shares is the most effective way for Australians to build additional wealth and retire earlier and more comfortably than they would by relying on their salaries, savings and superannuation.

But ASX shares build wealth most effectively when we properly harness the power of compound interest.

Compounding works more effectively the more time and money we give it. As such, I try and invest every spare dollar that I can, as soon as I can, into buying more ASX shares.

So, with the financial boost of a tax cut coming our way, I'm looking forward to ramping up my investing firepower.

Investing my tax cuts in ASX shares

The exact ASX shares I will buy with my tax cut money all depends on what the markets are doing at the time.

Ideally, I'd love to add to some of my favourite portfolio positions. These include Wesfarmers Ltd (ASX: WES) and Washington H. Soul Pattinson and Co Ltd (ASX: SOL). As well as the VanEck Morningstar Wide Moat ETF (ASX: MOAT) and MFF Capital Investments Ltd (ASX: MFF).

However, as of today, most of these investments are trading pretty close to all-time highs. If this continues, I might decide that the risk-reward balance isn't attractive enough to justify additional investments using my tax-cut money in the next few months.

As such, I might turn to some new positions. As I outlined yesterday, these could include Infratil Ltd (ASX: IFT), or the Regal Investment Fund (ASX: RF1). Or perhaps the high-flying L1 Long Short Fund Ltd (ASX: LSF).

If I don't like where those investments are priced at, I would probably deploy my new tax-cut cash into simple index funds like the Vanguard Australian Shares Index ETF (ASX: VAS). I think these investments are a great choice when all else fails the valuation test.

All in all, I expect any additional dollars I get from the tax cuts after 1 July to end up in the share market. In my view, this is the best choice for anyone wishing to build wealth as effectively as possible.

Motley Fool contributor Sebastian Bowen has positions in Mff Capital Investments, VanEck Morningstar Wide Moat ETF, Vanguard Australian Shares Index ETF, Washington H. Soul Pattinson and Company Limited and Wesfarmers. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited and Wesfarmers. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited and Wesfarmers. The Motley Fool Australia has recommended VanEck Morningstar Wide Moat ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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