Lesson 1: How to develop a saving habit
Do you always seem to have spent your pay before you’ve even received it? Is your bank balance always hovering just above zero as you live from one pay cheque to the next?
Unfortunately, this is an all-too-common situation for thousands of Australians. We all want to be better at saving money, but how do you stop spending and start pinching pennies?
The key is to develop a good savings habit. Here’s how.
Before you can start to think about building a bigger savings balance, you first need to look at how you spend your money. Sit down and work out all your weekly expenses in a budget.
Let’s say you earn $1,000 a week. Calculate how much of that goes towards your rent or mortgage, phone, Internet and other utilities, groceries, fuel, public transport, dining out and other entertainment activities. Once all your expenses are accounted for, how much of that $1,000 is left for you to play around with?
This will help you form a much clearer picture of your overall financial standing, and you will then be able to focus on key areas where you can cut back.
The next step is to cut the fat out of your budget. For example, is it worth paying for an expensive gym membership when you only work out once a month? Do you need to eat out five nights a week when you could save money by cooking for yourself at home more often?
Think long and hard about the difference between the stuff you actually “need” to pay for, such as rent and groceries, and the stuff you “want”, like a new plasma TV or expensive weekends away whenever you have a bit of spare cash. You’ll soon realise that there are some areas of your life where you can cut back on your spending.
This doesn’t necessarily mean you have to forgo all the things you enjoy in life, but you might have to be a bit more sensible about how often you spoil yourself. Be disciplined and you will reap the rewards in the long run.
Now think about why you want to save money. Do you simply want to become more financially comfortable and not have to worry about how you will cover any unexpected bills that arrive? Or do you have a specific goal in mind, such as a new car, a round-the-world holiday or even a deposit for a house?
Once you have a target in mind, you can start to consider how much you need to put away each week and how long it will take you to reach your goal. There are plenty of handy online calculators to help you work out how much you will have to save each week to build the bank balance you require, so use them to start developing a savings plan.
Having a target to work towards can also help to increase your motivation to save, which can come in handy if you’re ever tempted to dip into your savings.
Next, start looking for the right savings account to help improve your bank balance. The key feature that sets a savings account apart from a regular bank account is that it allows you to earn interest on your account balance. Although interest rates in Australia hit all-time lows in 2016, you can still find savings accounts that provide high interest rates and can make your money work harder for you.
There are many different types of savings accounts available, each with its own benefits, and you can compare them all at finder.com.au. Types of savings accounts include:
- Online savings accounts. Online savings accounts pay interest at a high rate and offer 24/7 access to your funds.
- Bonus saver accounts. Also known as reward saver accounts, these pay bonus interest when you satisfy special conditions. For example, you may need to deposit a minimum amount each month and not make any withdrawals.
- Notice saver accounts. A notice saver account allows you to earn interest on your savings, but you are required to notify your bank a set period of time in advance before you can withdraw funds. Typically, notice periods are 31, 60 or 90 days.
- Introductory-rate savings accounts.Introductory bonus accounts pay a bonus interest rate for a “honeymoon” period, for example for the first four or six months after you open an account. Once this period ends, the account reverts to the standard variable rate.
- Term deposits. Term deposits allow you to invest your money and earn a fixed interest rate for a set period of time, but you will be unable to access your money until the end of the term.
The main factor to consider when comparing savings accounts is the interest rate, as this will have a huge bearing on how much your bank balance will grow. However, you should also make sure you’re aware of all fees and conditions that apply. Look for an account with no ongoing fees, and check the conditions you need to meet to earn maximum interest, whether a linked account is required, and the ease of use of the bank’s Internet and mobile banking portals.
Once you’ve found the right account you can apply to open an account. In many cases this can be done online, but application is also available over the phone or by visiting a branch. You’ll need to supply valid photo identification and in some cases you may also be required to open a linked transaction account with the same bank.
The key to building a good savings habit and a bigger bank balance is making regular deposits. Rather than doing this manually every time you get paid, set up an automatic direct debit from the account your salary is paid into.
This saves time and hassle, and removes the temptation to spend your pay cheque rather than putting money aside. Set it up so that a recurring transfer is made from your transaction account to your savings account every time you are paid, be it weekly, fortnightly or monthly.
Once it’s up and running, you’ll be able to save without lifting a finger.
Regular deposits are one thing, but what happens when you get an unexpected windfall, such as a bonus from your employer or a juicy tax return? Your usual response might be to go on a shopping spree, but here’s where your new-found financial discipline needs to come to the fore.
Sure, you can keep some of the money available to treat yourself, but try to transfer as much as possible into your savings account. This will provide a welcome boost, meaning not only a bigger balance but also the ability to earn more interest.
The final step to help develop a good saving habit is to check your progress regularly. Once every month or two, check in on your account balance to see how much you’ve saved and how far away you are from your goal.
This has two benefits. The first is that you can review how your account is performing. Does it still offer a competitive interest rate, or is there a better deal elsewhere?
The second benefit is purely motivational. Seeing how much you’ve managed to save in such a short amount of time can be a wonderful confidence booster, and may even inspire you to increase the size of your regular deposit.
There’s plenty more you can do to develop a good saving habit, including:
- Pay off debt. It’s very difficult to save when you’re weighed down by debt. Before you even start saving, it’s generally worth getting rid of any existing debt you have to stop interest charges eating away at your bank balance. If at all possible, avoid taking on further debt as well.
- Resist the desire to upgrade. Your current smartphone works just fine, so do you really need the latest model with a slightly bigger screen? You’ve already got a million pairs of shoes, so is that gorgeous new pair of red heels really a must-have? A sensible approach to buying what you need rather than what you want can provide a big boost to your savings power.
- Resist the temptation to dip into your savings. Your savings account is there to help you save more money, not spend it, so don’t give into the desire to regularly chip away at your savings balance. If you’re someone who always spends your savings, a term deposit (where you can’t access your funds) or a bonus saver (that pays a lower interest rate if you make any withdrawals) could be a good choice.
- Use your spare change. Every little bit helps, so putting your spare change into a piggy bank or money jar can quickly add up. For a modern, digitised version of this, some banks offer savings accounts linked to your everyday transaction account, rounding up all purchases to the nearest dollar and transferring the “spare change” into your savings account.
- Start as soon as you can. The power of compound interest is quite remarkable, allowing you to earn interest on your interest. The earlier you start saving the better off your balance will be.
You can find many other great ideas in our guide to money-saving tips. The best thing about improving your money management skills is that once saving becomes a habit, it’s a habit you will stick with for the rest of your life.