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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