Even people on very low income manage to save, and people on high incomes sometimes don’t – in both cases the key to success/failure is spending less than you earn. Even a few dollars less is enough to start (although it won’t get you there fast), but just a few dollars too much snowballs. Because if you overspend, say, $500 in a year, the next year you have to change your spending habits by $1000 to break even ($500 to reverse the damage and $500 to avoid doing it again). Of course, most people don’t do this, so the damage gets bigger and bigger.
There are a couple of ways you can do this. You can force it by putting money into savings at the beginning of the pay period and compromising/going without towards the end of the period as you’re running out of money. That’s not the ideal way to do it. It doesn’t teach day-to-day moderation, and there’s a pretty high chance you’ll dip into savings “just this once”. But if you’re not a great everyday-planner, it’s better than having no controls at all, and it will, at least, make you weigh some of your choices a bit more carefully.
The better way is to make a proper annual budget. Do it in a spreadsheet. Down the side, put your expenses. Start with your known, fixed expenses – rent, insurances, etc. (I also include electricity and other utilities here, because that’s quite difficult to reduce in a targeted way – not impossible, but difficult. And home utilities are IMO one of the last things you should cut. You should be comfortable in your own home unless the wolves are REALLY at the door). Then list all the “variables” like groceries, eating out, etc. Include everything. If your lifestyle includes four weekends away a year, include an allowance for it. If you have crap teeth and go to the dentist a lot, include it. If you’re a paranoid pet parent and take your dog to the vet for every sniffle, include it. If you “lend” money regularly to your deadbeat brother, include it. It’s your life and only for you. Tell the truth.
Across the top, put a few different scenarios. Living normally, minor sacrifices, major sacrifices/living lean, and emergency levels. For the variable expenses, come up with an idea of how these might look. So let’s say your groceries are normally $200/week (quite easy to do in Australia) – that goes in the first column. For the second column, think about how you might comfortably reduce this on a long-term basis to save a bit more. So we’re not talking major lifestyle change, we’re talking tweaks that won’t hurt too much, that you won’t bitterly resent. We’re talking sustainable change. You might drop from three Uber Eats a week to two. The groceries might drop to $180 by being a bit more selective about produce, buying in-season, that sort of thing. (Add what you would change as a comment for that particular cell in the spreadsheet, too). The third column is for fairly aggressive lifestyle change – the sort of thing you might do for six months to save for a car or an engagement ring. You can sustain it for a while for a big goal, but not indefinitely. So this column is where you might cut the Uber Eats out all together, change your commuting method, etc. And the fourth column is for the crisis situation where you need money to get out of a hole that week/month and you slash everything to the bone. You can’t do it for long, but maybe you can do it for a month or two.
Total up each scenario, and then add a margin for error (say 5-10%). Then make a new total. Then compare it with your take home pay. (Make sure you factor in FEE-HELP, Medicare Levy, etc). See how much money you can realistically save in each of these scenarios. In particular, consider your Minor Lifestyle Change column. See what that lets you save, think about what you could do with it, and whether you could live with the small changes you’ve identified to get it. You might decide you could do a bit more to save a bit more. You could add in an extra column for A Little Bit More Minor Lifestyle Change.
At this point you will probably have some sort of lifestyle and spending/saving model that isn’t that far removed from the way you live now. Copy that model into a new worksheet and add a column to convert it to weekly/fortnightly/monthly, whatever matches your pay periods.
You should be confident enough about what this lifestyle looks like now that you could do some work with bank accounts with a fair degree of certainty. I don’t worry about this now (I’m disciplined enough now to just pay everything on credit card and then pay out the card in full each month), but when I was starting out on my finances, I had a separate bank account for my quarterly and annual bills – insurance, electricity, car rego etc. I transferred in that pay period’s “share” each time. It took about six months for the balance to accumulate against the new bills coming in, but there came a point where there was consistently enough in there to pay those bills, without drawing on my other spending money. So each payday I would pay into the bills account, I’d pay my rent, and later, when there was room in the budget, I’d pay into savings. And then I lived on the rest.
So that’s the hardest part. Making good investment decisions matters too, but just spending less than you earn gets you more than halfway there.
Once you’re at the point of investing:
Superannuation is a good investment. Early on, if you think there is a high risk you’ll be tempted to raid your savings, I’d focus on super, because it is tax effective and it’s locked away. It’s not quite as good a deal as people make out compared to other investments but it is much better than saving for six months and then spending it in a fit of weak resolve. There is a maximum concessional contribution each year. I think it’s $30K at the moment (check this!). So if your employer is putting in $18K, you could put in up to $12K by salary sacrificing from pre-tax pay. However, I do encourage you to save at least a small amount into a “liquid” interest-bearing account as well, and get used to ignoring it while it builds up.
If you have a FEE-HELP debt, seriously consider making it a priority to pay it off once you hit the higher tax brackets (depends on the balance and how certain you are of staying in a high bracket, though). Although it’s “free” (besides CPI), at the top repayment bracket, FEE-HELP takes 8% off your income. There may come a point where this affects things like your borrowing capacity (out of all proportion to the actual debt still on the books).
You will find that you get better at self-discipline over time. (This only works if you’ve made sustainable lifestyle changes though. Most people are not really willing to go to work all week and then come home to a house full of food/toiletry/etc choices they don’t really like on a permanent basis, if they have a choice. Going draconian is temporarily effective but it doesn’t build habits that last a lifetime). Once you’re consistently ignoring your savings account, even on a “tight” week or month, you can start branching out into other investments like shares or property. Other investments can be very nearly as good as super in the longer term, and they have the considerable advantage of extra flexibility and, in some cases, improving your life in the here and now (eg your home, but not every home is a good investment). I only put the minimum in super now and invest most of it outside – but I only started doing that once I had a track record of saving and investing well. I started by focusing on super and it was an excellent strategy for that time of my life.
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