No matter what your goal is, whether it be for purchasing a car, maybe a house or even for retirement, here are some simple steps and tips to consider when looking to build your savings.
- Choose a goal
When it comes to savings, instead of asking how to save, it’s important to understand why you want to save. This is because your savings goal will shape the strategies you should consider when trying to save.
The first thing to consider is the timeframe of your goal, is it short-term, medium-term or long-term?
For example, wanting to purchase a car could be a short to medium term goal, whereas wanting to save up for a house may be a longer-term goal. Generally speaking, the shorter the timeframe is, the more liquidity you want and the less risk you want in your saving method. A quick breakdown that may help you is listed below:
- Immediate to short term: consider cash, keeping your funds in cash provides you with the highest level of liquidity so you are able to spend on demand.
- Short to medium term = consider defensive assets, this could include term deposits or bonds. By investing your savings into defensive assets, you minimise your level of risk and can generally forecast a set return once your investment reaches maturity.
- Medium to long term = consider growth assets, this could include investing in shares or ETFS. For longer term goals, you have the benefit of time to help you ride out the volatility of the market, therefore generally minimising the risks of investing in growth assets, whilst gaining the benefit of potentially higher rewards.
Secondly, it is important to ensure that your goals are realistic and attainable. The SMART goal-setting method, coined by Edwin Locke, outlines that your goals should be Specific, Measurable, Attainable, Relevant, and Time-bound to be effective. This is a strategy which investors can adopt to ensure that their goals are structured in a way which will give them to best opportunity to achieve them.
- Understand your finances
Now that you have a goal in mind, it is important to gain a thorough understanding of your current personal finances. In this step you should consider your sources of income, your expenses, any outstanding debt etc.
It may seem overwhelming to collate all this data at once, so to help you can consider spacing out this process over a month, or over that period you should receive your pay slips, and incoming bills for expenses such as rent or utilities. Additionally, something to look out for is the discretionary spending you do over this period. Do you buy multiple coffees in a day, or do you purchase lunch every day?
Hypothetically, if you purchase a coffee for $3.50 once a day over your 5-day working week, you end up spending $70 per month and $840 per year. These little details add up and its important to account for them when understanding your current financial position.
- Create a budget
After gaining an understanding of the sources of your income and expenses, it’s now a good time to allocate set amounts to your different expenses to see how much money you have left over to save. Through this process you may find areas that you may be overspending in and can look at different options to potentially reduce costs.
- Keep your savings in a separate account to your spending money
Its very easy to spend money when its easily accessible to you. We recommend finding an appropriate way to separate the money you need for your living expenses to the money you would like to save. This could be by simply opening a separate bank account or choosing to invest your savings. Either way, the common phrase ‘out of sight, out of mind’ could not be more applicable.
- Automate your savings
By automating payments to your savings, its almost human nature to subconsciously treat your savings as another non-negotiable expense. Therefore, you will be less likely to spend those funds that have been put away.
- Cancel any unused subscriptions
It may seem obvious, but research released by ME, suggests that unused subscriptions account for a $200 loss annually for the average Australian. Its very easy to sign up or subscribe to a service when we want it, the allure of the free trials is tempting for everyone, but it takes a little more discipline to be proactive and cancel unused subscriptions, especially when things get busy. We recommend taking that extra 10 minutes to review your subscriptions when you have a free moment, every dollar counts!
If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.
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