How and Where to Save
Saving is a bit like trying to lose weight. Its one of those
things that you know you should do, but there are too many
temptations in the way. Besides which, who wants to go without,
especially at this time of the year? But let’s be blunt. Losing
weight means you have to eat less, and the only way to save is
to spend less than your income.
It’s quite simple really. You know what your income is. Take
off your savings first and then spend what’s left. Saving is
something that you do by choice. To save is to choose not to
spend now but to spend later. Unfortunately, most people,
especially the younger generation, want it all now! If you
choose to have a new car, satellite TV, a holiday overseas,
several magazine subscriptions and so on, then the money you
spend is money you have chosen not to save. Your ability to save
is determined not by your income, but by your spending.
I have seen couples on six figure incomes who can’t save, and
people on benefits who can. To start saving, decide how much you
want to save, and deduct that money from your income as soon as
you receive it. There are three ways your savings should be
used. The first is to use some of it to repay any debts that you
have, whether that be a mortgage, credit card debt, store card
debt or hire purchase. Repaying debt will give you the highest
guaranteed return on your money that is available.
For example, if you are paying 19.95% interest on your credit
card and have $100 in savings that you can either put in the
bank at 7.00% interest (less tax) or use to reduce your card
balance, then quite clearly you are better to put it on your
card where in effect you will get a return of 19.95% after tax
on your money. Make your debt repayments by automatic payment
and start by paying off debt that has the highest rate of
interest, then work down the list to your mortgage. By
voluntarily increasing your fortnightly mortgage repayments you
will pay thousands of dollars less in interest over the life of
your loan.
The second way to use your savings is to set up an automatic
payment into a savings account to cover one-off large items that
you plan to spend money on in the next 1-5 years, such as
holidays, appliances, a new car, a deposit for a house etc and
to cover unplanned items such as car repairs and dental bills.
As the money accumulates, you can put some of it into a term
deposit at a higher rate of interest until such time as you need
it. The trick is to use only the money you have set aside into
this account to pay for these items and not to increase your
debt.
The third way to use your savings is to set up a direct debit
into a long term diversified fund where your money can be
invested for at least five years. This fund can be used to save
for your retirement and for any spending you have planned for
the medium term (five years or more). A diversified fund will
invest your money in a combination of fixed interest, property
and share investments that should give you a higher return over
a 5-10 year period than leaving your money in the bank.
Ideally, your savings should be split in all three of these
ways. While you still have debt, put more of your savings into
debt reduction than into the other categories. Once your debt is
out of the way, increase the amount going into your long term
fund. By setting up these three ways of saving as automatic
payments and direct debits, you will save automatically. Then
it’s just a matter of keeping your day to day spending within
what is left of your income.
Just remember it’s your choice – you can choose to spend or
you can choose to save.
September 2008
