Saving money may seem like a simple idea to some, but a 2018 ANZ Health and Wellbeing Survey revealed that 893,000 Australians are struggling to get by, with more than 378,000 Australians having no savings at all. As saving money isn’t covered in the schooling curriculum, I’m going to break down the basics of savings to teach you how to start saving money.
Your needs are things that you physically need to survive/operate day-to-day. This also includes any debts or things that have to be paid off. To work out your needs amount, grab a piece of paper and write down everything that you need to function in daily life (this also includes things you need to pay like debt). Common needs include Rent/Mortgage payments, Transportation, Food, Utilities, Phone Plans, Internet and Debt.
Try and work these out to be in alignment with when you get paid. For example, if you get paid each fortnight that’s 26 times a year that you get paid. If you pay for electricity twice a year, divide the total cost of both payments by 26 and that’s how much you need to take out of each paycheck to cover it. If you buy groceries every week, times it by 2 to work out how much you spend a fortnight and so forth. The combined total of all that you need to pay is your needs amount.
Wants are the things you enjoy but don’t necessarily need. They typically include things like grabbing take out, going to the movies, bowling, subscriptions to things like Netflix etc. Things that may enhance your quality of life but aren’t essential to function. Similar to the above, work out how much you spend on wants each fortnight or whenever you get paid.
For example, if you pay $12 for Netflix each month, that’s $144 you spend a year. There are 26 fortnights in a year so $144 divided by 26 = About $5.40 that you pay towards Netflix each fortnight over a year. If you eat out twice a week and it costs you $20 per meal. That’s $80 you are spending on take out each fortnight and so forth. The combined total of all that you need to pay is your wants amount.
So you know how much you are spending on wants and needs each time you get paid. Make sure that your income is greater than the sum of both. If it isn’t, take a deep look at your wants and work out what you can cut back on. Similarly, if you notice that you are paying an exponential sum on some needs, such as you pay too much for food each fortnight, or your phone bill is through the room, try and change plans or look for cheaper alternatives. Do this and when your income is greater, subtract the combined total of your Wants and Needs from your income. This is your savings figure.
Now that you are making more money than you’re spending, the next rational step is to start putting the money away in a savings account right? Nope, pay off your debts first. Loans and credit cards often come with interest rates over 5%. Conversely, savings accounts typically only offer interest rates of around 2%. What this means is that the money you can make by putting your money into a savings account is being offset by the excessive amount you spend on paying off the interest on debts. If you can eradicate your debt, you will be in a neutral position where you can solely focus on saving your extra income.
The Exception to the Rule: HECS and Mortgage. HECs debt is essentially an interest-free loan, it only rises with inflation, so you’re not paying any excess on the debt owed. Therefore it doesn’t make much sense to pay it off immediately, because when adjusted for inflation, you’re still paying the same amount, just at a much quicker rate. Mortage wise, yes it can be beneficial to pay off your house faster and if you’re in a position to do so, then, by all means, go for it. But it’s important to at least build up a decent savings amount first in case you run into any surprise financial hardship.
Now you can start saving, you make more money than you spend, you have no debt and you can safely put the extra money you make each time you get paid into a savings account. If you are unsure on how to choose a savings account, I cover it in detail here. I recommend building an emergency buffer to act as a backup plan in case things go south. As a rule of thumb, try and save at least 3 months worth of your living expenses. That way, if you lose your job, chip a tooth or your car breaks down, you’re not struggling to make ends meet.
And there you have it, a simple guide on how to save money. If you have any additional tips that you use to save money or if you want to learn more, please leave your feedback below and I’ll get back to you.
The following are guides that I have written which cover some of the key concepts outlined in this article. They can be a great starting point for anyone looking to get started on their FIRE journey.