101 Steps to Financial Freedom: Exploit worthwhile government free money schemes

Governments sometimes offer "free money" via complicated schemes designed to incentivise or reward desired behaviour. These programs are usually poorly designed and targeted but an ethical simplifier should grab any real free money with both hands. If you like you can give it to useful charities rather than see your government blow it on useless defence projects.

One scheme worth taking advantage of - First Home Saver Accounts (FHSA) - recently concluded in Australia and the final tally is in on the free money on offer.

Many other government schemes may seem like free money but are generally not that advantageous or have significant pitfalls or risks. Australia's First Home Owners Grants are a great example as they actually transfer most of the benefit to the vendors of the property while luring in young people to buy when renting is often far better for their finances and quality of life.

The key lessons are to look out for such government schemes, separate the good from the bad ones, and maximise your advantage quickly before they close. As with many such schemes, it often takes savings, research and a little effort to make the most of these opportunities.

How did the First Home Saver Account (FHSA) scheme work?

You can read all about them here: MoneySmart - First Home Saver Accounts

Essentially, prospective first time home owners could get paid 17% bonus interest on up to $6000 of savings each year that they deposited into one of these special accounts which had restrictions intended to ensure the savings were used to purchase a home. All interest was also only taxed at 15% within these accounts.

Unfortunately, the government made the scheme too complicated and restrictive and hardly anyone exploited these accounts for their desired purpose. The scheme was intended to run indefinitely and allow balances of around $100,000 to build up but it was terminated in 2014.

The Rudd Government introduced the First Home Saver Account scheme in 2008 but it has proven a flop and has been earmarked for the scrap heap. It was expected 750,000 Australians would use the accounts but new figures this week show numbers have failed to go higher than 46,000.

The total amount held in the accounts sits at $521.5 million or $11,360 per account. Despite interest rates remaining at historically low levels FHSAs offer first-time purchasers a 17 per cent return on the first $6000 deposited each year.
Property buyers failing to apply for First Home Saver Account scheme

How to assess if a scheme is worth taking advantage of

The government rules for the FHSA scheme were unnecessarily complicated and burdensome and were eventually relaxed just before it was scrapped. The rules included:

- You had to save at least $1,000 each year over at least 4 financial years before you could withdraw the money. The 4 years did not have to be consecutive.

- If you didn't use the money to buy a house, you couldn't withdraw it and it would have to go to your superannuation account instead.

- If you bought a house before the 4 financial years were up you couldn't use the money to fund the deposit or mortgage at any time.

However, it was pretty obvious at the outset that the original rules were unworkable and the restrictions would prove unenforceable. I had no definite intention of buying a house with the money saved in this account and figured the scheme would eventually be closed or the rules changed. Sure enough both happened. When the FHSAs were shut down all money became available to be withdrawn by account holders.

A really savvy finance guide (e.g. blogger) can give you the real dope on whether such schemes are worthwhile and what will likely occur in future. Feel free to ask about any government scheme in the comments on this post. If any future government schemes come along that are worthwhile, I will provide the best available guidance and updates on this blog.

So how much free money was available via the FHSA scheme?

I picked the bank with the highest bank interest rate (ME Bank) and maximised the amount I could earn 17% interest on for each of the 6 years the scheme was open. My final statement at scheme end at 30 June 2015 is below - a closing balance of $43,575.

From 2009 to 2014, I deposited: $5,000 + $5,000 + $5,500 + $5,500 + $6,000 + $6,000 = $33,000.

The 17% bonus government interest over these 6 years was: $850 + $850 + $935 + $935 +$1,020 + $1,020 = $6,010.

The bank interest taxed at only 15% came to: $43,575 - $33,000 - $6,010 = $4,565.

Note that over the 6 years you are earning bank interest on the accumulating government bonuses too. In 2009-2010, interest rates at ME Bank were as high as 6.5%. By 2014 they were down to 2.25%. You often need to make careful initial choices with such government schemes as their constraints affect the maximum benefits available. For the FHSA scheme, only a handful of banks offered these accounts and most paid significantly less bank interest than the top market rate available as the customer was locked in and primarily concerned with the 17% bonus interest. I estimate the difference between the best and worst banks offering the FHSA was at least $500 in bank interest over the 6 years.

I estimate the total free money over the 6 years (bonuses + interest on bonuses + 15% tax rate benefits - slightly lower bank interest rate) was around $7,500.

A key lesson here is that you often need existing savings or the ability to regularly save to be able to optimally exploit these opportunities. While the government promised this scheme would be open indefinitely and pay out till your balance reached around $100,000, it was always destined to be shut down much more quickly. Most people who opened an FHSA did not deposit anywhere near the maximum of $33,000 but if they'd known the scheme would end in only 5 years and that all the stupid restrictions would go away, they would have sought to save much more through this scheme.

Growing substantial, immediately-redeployable cash savings is always a key plank of financial independence. You don't have to always keep it in cash if interest rates are very low (e.g. in the U.S., Europe). But you do often need to be able to deploy cash quickly to take advantage of opportunities.

If Australia had better governments it would implement pro-savings policies permanently such as those in Ken Henry's tax review (an equitable 40% tax discount for all investment types). Instead, saving is currently penalised compared to taking on debt and speculating on capital gains. So it's up to individuals to be smart, prioritise saving anyway, and capitalise on the short-term opportunities when they come.

If you keep saving the FHSA free money how much will it grow to or pay out annually?

The value of free money doesn't just end with the lump sum. If you invest it safely at a reasonable return (e.g. 5%), it can grow to a considerable size with time, or pay out annual passive income indefinitely.

The $7,500 of free money will either grow to $12,217 after 10 years at 5% interest or provide a bonus $375 each year indefinitely if I choose to spend the interest each year.