Summary
Spending money seems to be easy for most people. Saving money, not so much. Saving seems to be an acquired skill, but the time you devote to it is time well spent. Good money management will enable even those with modest incomes to achieve financial security. Of course, being able to save money requires that you have something left from your paycheck after paying for all the essentials. Preparing a good budget is key; fortunately, it’s not all that difficult to do.
Content
Spending money seems to be easy for most people. Saving money, not so much. Saving seems to be an acquired skill, but the time you devote to it is time well spent. Good money management will enable even those with modest incomes to achieve financial security. Of course, being able to save money requires that you have something left from your paycheck after paying for all the essentials. Preparing a good budget is key; fortunately, it’s not all that difficult to do.
Begin by making a list of all of your current monthly expenses: housing, utilities, food, insurance, transportation, clothing, personal services, medical, entertainment, loan repayments, and any other expenditures you might have. If the total exceeds your current income, consider ways to cut back. According to a study on spending patterns released in 2015 by American Express1, Australians spend 20% of their disposable income in two categories: (1) entertainment and events and (2) electronics and gadgets. Look for ways to reduce the amount you spend on these items. Do you really need that new smart phone? Can you watch that AFL game on TV instead of paying a hefty price to attend the game, not to mention the inflated prices of the snacks and brews you might consume while there? Some other cost-cutting ideas include switching from your TV provider’s premium package to a more basic package, organizing a carpool or using public transportation, and/or increasing the deductibles on your car insurance. If you’ve slashed all you possibly can and you are still spending more than you make, consider taking on a temporary part-time job. Getting out from under the burden of debt will be worth it.
Once your income exceeds your expenses, don’t find other ways to spend the extra cash. Instead, include yourself as an expense item and commit to depositing a set amount of each paycheck into a bank savings account. You won’t be able to earn a high return on this money, but it is liquid, meaning you can withdraw it in the event of an emergency. Financial gurus differ on the amount you should have accumulated for an emergency fund, but an amount equal to three to four months of your monthly expenses is a reasonable target.
After you’ve built up your emergency fund, it is time to begin investing your additional savings. Although the money you deposit in your savings account is safe, you won’t increase your wealth with this strategy. In fact, you might even lose some purchasing power. While you can lose money when investing in the market, you also have the potential to earn a substantially higher return than you will on money in a savings account. Consider this: the average interest rate paid by banks on online savings accounts fell to 1.25% in December 2016 2 while the return on the All Ordinaries Accumulation Index (XAOA) was 11.6% in 2016.3 Big difference!
1https://www.insideretail.com.au/blog/2015/03/17/spending-patterns-revealed/
3http://www.marketindex.com.au/sites/default/files/statistics/historical-returns-infographic-2016.pdf