How to be great at saving money
It’s a comfort to know you can get your hands on some money quickly if you need it – without resorting to a loan from a bank, family or friends. It’s also a comfort to know you’ll be able to reach goals like buying a home and retiring comfortably. Saving money is the key to all of that.
To save money, you don’t need to make huge changes to your lifestyle. You don’t have to somehow find a job earning 5 times your current salary. What you need is a few realistic, do-able lifestyle tweaks – one of which is to simply make the decision and commit to saving some money.
If you are just starting out OR you already have a house and some savings, the ideas below can make a big difference to your savings and your future security.
It needn’t be a chore to save money. Invite friends over to your place instead of going out. This, plus dozens more money saving ideas, can make a huge difference to your future savings.
How much should I save?
The answer is always the same: As much as you can! And start early!
Don’t just focus on the usual life wishes, a house, holiday, car etc. When you switch focus from saving money for “a thing” to always growing your savings in general, your financial future is automatically getting better.
According to bestselling author, David Bach (The Automatic Millionaire, Start Late Finish Rich, Smart Women Finish Rich) you should pay yourself first and prioritise saving for two very important expenses; a retirement fund and an emergency savings fund.
The older you get, the more money you need to sustain your lifestyle and expenses – and the harder it is to get another job if something bad happens.
Automate your finances
Automating important repeat tasks makes your life (or a business) more efficient. This applies to your savings as well – and it takes the stress and indecision out of saving money.
The best habit of successful savers and entrepreneurs is to eliminate repetitive decisions about saving. That makes saving work out better, and it is just easier.
When you transfer money into your savings account, it should just happen. Don’t make saving an option or a decision each time. Because if it’s “manual” then like most people, you might delay saving or divert money to short-term purchases that aren’t really important for your life.
Automating your savings takes human error – or lack of commitment – out of the equation. Set up a direct debit into your designated savings account so that your extra income is whisked away from temptation straight away. Every payday, some of the money goes to a separate savings account. After it is set up, you won’t give that extra money a second thought.
Increase your savings as your income grows
When you get a salary increase, before you do anything with the extra money, increase the amount you save – by at least the same percentage as your raise. So a 5% salary increase means a minimum 5% increase in how much you transfer into your savings. Obviously if you can increase that further, do it, before you get used to spending the extra income from your salary raise.
What if I can’t afford my savings plan?
Don’t panic. Remember, if you set up an amount for automatic savings and it turns out you don’t have enough left to cover your basic expenses, you can trim it back so you don’t struggle to pay bills or other important expenses. But, try not to reduce your savings amount just to get extra ‘play’ money. That’s a common mistake that people regret a bit later.
“Where does my money go?” Know what your expenses are
Do you really know what you spend your money on?
Knowing what you spend is the first step in knowing what you can save. It’s often a bit of a shock when you sit down and work out what you spend each month on “non-essentials”. If you haven’t already done this, check your bank statement and credit card and track your cash spending for a little while. Then, write your weekly/monthly expenses into two lists: the essentials and the non-essentials.
Take a good look at the non-essential list. Can you trim some items from this list, things you don’t really need to buy? Even if you don’t eliminate a lot of items, you can usually cut down the amount you spend on those same items.
Saving money doesn’t mean you need to stop having fun. Just choose difference activities, like hiking, that don’t need money.
How to stop impulse buying
Are you guilty of impulse purchases? Retailers are very good at enticing them out of us with end-of-aisle, two for one or add on specials. Online you are likely to see adverts for items you have purchased previously, wherever you go online. Marketers and merchandisers make it very easy to fall into bad habits that are hard to stop. To save money efficiently, you need to battle the beast and commit to stopping.
A few changes like these can help:
- When you go out, leave your credit card at home. This reduces the temptation to make sudden purchase and it gives you some “cooling off time” to think more carefully about whether you really need something.
- When you shop, first write a list of what you need to buy. Simply don’t buy anything that’s not on that list.
- Give yourself a ‘play money’ limit – a limit for all non-essential purchases or expenses. It doesn’t need to mean you can’t do fun stuff that you like – it just means that fun spending is not a daily random habit – it has limits.
- Don’t visit a shopping centre unless you really need to. This can really cut down impulse spending and after a couple weeks, you might not even notice the lifestyle change.
- Always eat before you go to the supermarket. When you are shopping for food, a full tummy means much less temptation to buy extra treats.
How to manage your debts
The biggest block to saving money is existing debts. But that is fixable!
Don’t ignore debts and hope they’ll go away. They won’t. Debts only get bigger and harder to deal with.
Top tips to handle your debt problems:
- Prioritise debts with high interest, like credit cards. These are the ones you pay off first, because these debts can grow quickly all by themselves if you don’t stamp them out.
- If your debts are affecting your life negatively, consider re-structuring or consolidating so that your debt is more manageable. Talk to a professional who can help you get on track.
- Never rely on payday loans, or anything like that. Stop taking money – or buying things – that you have to pay for later. If that seems harsh, don’t worry. After your debts are gone, your life gets back to a much happier ‘new normal’.
- Save something, even if it’s just a few dollars a week, $10 a week is still $520 a year. Never give up on your saving goals!
I realised by understanding the language of money, the rest of life’s problems can get in line. Money is simply transportable power. The more you control, the more control you have over your own world.
Clayton Daniel of Fund Your Ideal Lifestyle
A boost toward your first home: FHSS
The First Home Super Saver scheme or FHSS helps first home buyers save for their first home – faster. Basically, FHSS means you can put extra money into your superannuation fund, temporarily, saving money while you pay less tax. Later you can withdraw that extra money to help buy your first house.
The basic details:
- Pre-tax contributions to your fund – and earnings on investments – are taxed at 15% rather than the marginal tax rate
- When the money is withdrawn it is taxed at the marginal tax rate less a 30% tax offset
- First home buyers can save up to $15,000 a year into their super accounts as extra contributions to be released under the FHSS scheme. The release limit is $50,000 across all years, from July 1 2022 (Prior to this date, the limit was $30,000.)
- Couples can combine these extra savings toward a single first home purchase
Plus a little help for downsizers?
It’s also worth noting a bonus for mature home owners (65+) who plan to downsize. A contribution of up to $300,000 of the proceeds the home sale can be made into your Super, in addition to existing caps. However, this change to a superannuation balance will affect the age pension assets test. Talk to your superannuation advisor before you sell up.
12 Life Tweaks That Help You Save More Money
Small and relatively painless adjustments can boost your money saving without hurting your lifestyle.
Here are a few ideas to help you along:
- SAVE YOUR TAX REFUND! Your tax refund will give your savings a healthy little boost each year.
- If you usually meet friends or family for lunch or shopping centres, meet at the beach or go to a park instead. Switch retail therapy and expensive lunches for nature therapy and a picnic.
- Do you really need that coffee from the café every morning? Ditching your $4 pre-made daily caffeine fix will save you $1040 a year!
- A big one: Quit bad habits like smoking or mid-week drinking and see one of your biggest expenses disappear. The money will be BIG boost for your savings – and your health.
- Set saving goals and stick to them. When you commit to reaching small goals, the bigger goals become a reality far faster.
- Take a few minutes to educate yourself about money, just a little bit every few days. For example, get a subscription to Money Magazine or read an online money or investment article at least 3 times a week.
- Make ordinary things cheaper: Take your own snacks to the movies, car pool to work, take your lunches to work and choose generic brands. Then, save the difference.
- Don’t make saving seem like punishment. A lot of events, galleries and museums have free entry and there is always plenty to do and see in the great Australian countryside. Google “free events in my city” and you’ll be surprised how much is going on.
- Invite friends over instead of going out. Try “pot-luck” and get everyone to bring a plate of food or something for the barbecue – it’s fun plus, then you don’t pay for everything.
- Pay less tax on your savings – pay money into your mortgage. You pay off your mortgage faster and pay less interest. Saving money in an “offset account” could mean you pay less on your mortgage, in total.
- Work hard on debts. If you save money in a low-interest savings account, but you pay ten or twenty per cent interest on a lingering (or growing) credit card debt, that means you are going backwards. A credit card balance does not need to be part of normal life – keep your monthly credit bills at zero so you can stop paying extra interest money to the banks, then you’re set to get ahead financially.
- Make sure you claim all your deductible expenses and keep all your expense receipts throughout the year so your refund amount is as healthy as possible. Generally that means, use a tax agent like Etax who helps make sure you get the tax refund you deserve. Okay, that might seem like a bit of a spruik, but even people like Australia’s Inspector-General of Taxation, Ali Noroozi, agree. A couple of years ago, he told a Parliamentary committee,
“…I think every citizen is entitled to independent advice. They should not be getting all their advice from the tax office.”
If you’re not sure whether you can claim an expense, our accountants can help you out.
The million dollar question: “How can I save a million dollars?”
Have you ever thought about saving your way into the millionaire club? Yes, it is possible. Even people on modest incomes can become millionaires.
With the help of compounding interest, you can do it! But you need to start now, and stay committed.
Let’s look at an example:
If you are 20 years old, you have $0 savings and you commit to saving $500 a month at an average return of 3% per year, you’ll have $570,186 when you’re 65. Marry a partner who saved the same amount, then later you’d have a $1.5M boost on your retirement, together.
If you are 20 years old, you have $0 savings and you commit to saving $1000 a month at an average return of 3% a year, you’ll be a millionaire before you hit retirement age.
You can go faster than the calculator suggests. This calculator doesn’t include other factors that will help you save:
- You will probably increase your monthly saving amount as your career, and salary, evolves.
- Over time, the average interest rate will probably be a lot higher than the conservative 3% we used in our calculations. If the interest rate is double, your savings skyrocket over time.
- Investments you make along the way, such as property or shares, may increase your assets and overall wealth, considerably.
- Unexpected windfalls, work bonuses or inheritances could boost your savings over the years.
- Save the ATO refund from your tax return every year. If you get an average tax refund of $2000 per year, in just ten years (with interest) you could save an extra $25,000 or more.
Anything is possible when it comes to saving money. The trick is to focus on saving as much as you can, as regularly as you can. And make it happen automatically without constant micro-decisions like “should I save or should I buy a better microwave”. Those are self-defeating decisions sometimes. So make savings happen first.
It may seem like a tough journey in the first few weeks, but once you start saving you really will be surprised at how much satisfaction you get while you see your money grow. As you learn more about money and investing, you’ll soon discover many other ways to make your money work for you.
So what are we waiting for? If you want to get richer, you can do it with simple saving habits.
Disclaimer: These money saving tips are general in nature and intended as ideas for consideration only. Before you make any changes to your financial habits, talk to a professional financial advisor to get advice tailored specifically to your own circumstances.