Q22: How do I start saving?

You’ve got your eyes on an investment goal. Now you need to start saving for it.

I hope you watched our TMQ TV episode about investing goals. That should give you some ideas about choosing a saving target. In any case, deciding on a goal is the easy part. The next stage requires a bit more application.

The place to begin is by looking at your personal finances. Some simple accounting could help you to understand where your income is coming from and where your expenditure is going.

For most of us, this is a simple task. There’s only one item on the income side and that is from our job. If you have more than one job then add that in too. Some are even lucky enough to snare a bonus every now and then; add that to the list. Add them all up and that is our income.

Naturally, the good old Tax Man takes his bite of our income, but the rest of it is, deservedly, ours.

And so we spend it. We all have the expense of putting a roof over our head, so accommodation and energy bills are paid. Car and fuel payments are also often a big part of our expenses. Then there’s food, of course, some entertainment, clothing, and a few treats along the way. And your phone.

The difference between income and expenditure is our surplus. This is what is left over to save or invest.

You might have done this simple accounting and found that you don’t have a surplus. You’re not able to save because there’s nothing left over each month.

Change your priorities

You go to work every day and, whether you love your job or just tolerate it, you earn your pay. It’s money you work hard for. But, usually, you get your pay packet and start handing the money over to other people: landlords, phone companies, takeaway food outlets, pubs… Some of it is essential expenditure but some of it is purely discretionary.

If you’re serious about investing for your future you’ll have to make some changes. Change the way you think about money; change the way you spend. Change the way you look after yourself.

Here’s a suggestion: when your pay lands in your bank account pay yourself first. It’s your money, so put it to work for you. Aim to save 30% of your income, or if that’s too much, 20%. And put it away before you pay everyone else. That way, you know you’ve covered your highest priority (that’s you) and you can then go about spending whatever’s left. This makes accounting simpler, too. You don’t have to make a spreadsheet of income and expenses; you just pay yourself then spend the rest. It actually makes life easier.

You’re probably thinking, “This guy’s crazy. My expenses won’t let me save 30% of my income”. Maybe that’s right. Maybe you like to spend money. But here’s where you need to take a look at your priorities, your goals and your financial ambitions. It’s not rocket science to realise that to save for your future you have to give up some current spending. This is the part where you have to show some self-control.

It’s not unrealistic to save 20% of your money. Some easy places to cut down on expenditure include

  • rent: do you really need a flash apartment?
  • food: less eating out and Uber Eats
  • alcohol: cut it back, or drink a cheaper brew
  • cigarettes: just don’t do it
  • car: drive the cheapest car your ego can afford
  • phone: do you reallyneed the latest gadget?
  • debt: don’t borrow money, except for a mortgage

The “Pay yourself first” principle is a great way to keep your budget under control. After you’ve paid yourself you have the freedom to spend the rest of your salary, knowing that your top priority is already covered.

Show me how

According to the Australian Bureau of Statistics, in 2018 the average weekly earnings were $1,225. There’s a small amount of tax to pay, so that’s around $1,071 in your pocket every week. You are your number one priority, so pay yourself $200 a week, and do that first. Put it in an account and don’t touch it. At the end of every year take that money and invest it (we’ll talk a lot about how to do that in our next post). If you can save 20%, then you have over $10,000 a year going into your own little Future Fund. Even if you can only manage half of that, let’s do some quick calculations to see how that could work out down the track.

Assuming a conservative 6% annual compound return over 10 years, if you can save $5,000 per year, every year, you’ll end up with nearly $66,000. If you save $10,000 you will have almost $132,000. If you start when you’re young, you can let compounding do most of the work for you. The way the maths works is that the earlier you start, and the more you can put in, the higher the future amount will be.

I’ll concede that saving is a hard discipline, but if you learn it early in life and stick to it, the future rewards will be worth it. Especially if you’re young and just starting out, the Pay yourself first principle is a great habit to get into. As your salary increases you can save more. Try not to inflate your lifestyle and expenditure to fit your pay packet; if you get a pay rise, try to bank more of it. If you are lucky enough to get a bonus, try to give yourself a little reward and bank the rest. Remember that in order to say “Yes” to your priorities you’ll have to say “No” to something else.

Priority: You

Make yourself your top priority. You’ll thank yourself in the future.

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