Saving is a good discipline and one that can help you achieve not just your short term wants (a car, TV or holiday) but your long term financial goals as well.
Once upon a time, people saved for things before they were able to buy them. However, we have gradually drifted from being savers to being in debt, due to the easy availability of credit. Australians traditionally are not great savers, with the average Australian spending more than they earn (106% of their income in the early 2000s to over 120% in the past few years). This means they are using credit to purchase things. Put another way, they are using tomorrow’s income to fund today’s consumption (sounds very much like the way most governments operate).
This can seem like a great deal when interest rates are low, to buy now and pay later. But like any habit, it can be hard to get out of this mindset and the danger lies in overcommitting on current income and not taking into account the possibility of interest rate rises, which can catch the unwary by surprise at best or the worst case scenario is bankruptcy.
This also does not take into account the cost that interest adds to an item, even if they are low, particularly if it is a consumable or depreciating item or asset, where the actual value of the good decreases over time. When interest is added to the item, the final cost paid can far exceed the actual value of the item, even when it was brand new, and you could actually find yourself still be paying off an item after you no longer have it.
Perhaps a better way is to live within your means and save for the things you want.
How to save
The easiest way to start saving is to have this happen automatically without much or any effort required. This can be done by establishing a special savings account, preferably one that you can’t access easily, or one that penalises you, for example with lower interest rates, for withdrawals. An online account can be a very good option, as it may not have local branches or easily accessible ATMs which reduces the temptation to use this account for spending. Choose half yearly or annual statements to really demonstrate the account growing and it also means you’re not reminded of it very often. Then set up an automatic transfer to move a set amount from your regular account into this account. Or you might be able to speak with your payroll department to have them have your salary paid into two accounts, your regular and your savings account.
How much should I save?
How much should you put into your savings account? It’s completely up to you! A good rule of thumb is 10% of your income, but you can change this figure to suit you. Ten percent might be a bit much to begin with, particularly if you have outstanding loans to service. Look at the debt elimination post to get rid of these. Start with whatever you’re comfortable with and can comfortably afford. Once this has been put in place, you will probably not even miss the amount going into your savings account.
Be aware of all facets of your income which can include commissions, overtime, bonuses, tax returns, cash gifts, sales of assets and myriad other things. If your automatic transfer only transfers a set amount every week, fortnight, month or other interval depending on your pay cycle and a fixed base salary, you might need to manually transfer your percentage amount to your savings account on any additional income.
Use the miracle of compound interest. It is said that Albert Einstein called it the eighth wonder of the world. This is when you start earning interest on your previously earned interest, although its most dramatic effect is after you have been saving for a longer period.
Eventually you might think about setting up a number of savings accounts and to have at least an automatic transfer to your consumable items savings account (there’s that TV, car and holiday we were talking about) and an automatic transfer into what you should call your “wealth account”. This is to be used for investing.
You might also like to consider increasing your savings percentage over time. If possible you could increase the amount saved by half to one per cent annually or bi-annually until you are able to save a quarter of your income. If you are putting your investment savings to work for you, and you are generating income from these investments, you could consider putting a significantly higher percentage of this income into savings.
And remember, how much you earn has no bearing on your ability to save. It’s not how much you earn, it’s what you do with what you earn. The point is, it doesn’t matter how much you save or when you start saving, what matters is that you start.
Read about other people’s money and savings habits.