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Financial Spring clean
05 October 2018
I check my bank balances regularly, but I don’t look at my spending habits all that often. I always pay my credit card debt off and my mortgage on time, so I don’t think about my spending much. However, it recently occurred to me I should try and put a bit more in my Super.
So I trawled through my cards and savings statements to establish how much and where I was spending. I could see - in broad brush strokes and in no particular order – that it was on entertainment, food, mortgage, household living expenses, utilities, clothes, car expenses including petrol, travel, education, health, well-being, gifts.
But, imagine my horror having worked out how much I spend a week to learn that at some stage in the past 9 months, I’ve begun spending $40 more per week than I earn. I hadn’t noticed the shortfall. Why? Because my budget includes money for presents which, because we haven’t reached Christmas yet, I haven’t spent yet.
The problem is when we do get there, I won’t have the money I need and presents will be off the agenda this year.
Now I know where my money is going and how much is going out, I can easily identify what my ‘Needs’ and ‘Wants’ are.
Combing through bank statements to uncover where you are spending your money is tedious, but not particularly hard to do. The second step - freezing the unnecessary spending - is hard.
Because I like coffee and I don’t want to have to prepare lunch for work. I look forward to Friday night drinks and meals out. I love the convenience of driving places, and so on. However, I could drop the gym membership ($900 a year) and, instead, exercise en plein air.
I know that freezing discretionary spending (and let’s face it, that’s a major portion of most people’s spending) is difficult, but doing it will plug leaks in my budget and that makes saving possible.
To get motivated I had to reset my priorities. Would I continue my four-coffee, lunch-out-everyday, expensive-gym lifestyle or have more money in my super. It wasn’t hard to find where I could save $40 a week. Once I began the process of cutting out the unnecessary it wasn’t hard to find four times $40, and that’s about $8300 per year in potential savings.
Putting your savings into your super might not be your thing, just yet (although it could be something to consider, especially if you are a woman), so here are some other ways that you could make your savings work for you.
You could shop around for savings accounts and term deposits in which to put your cash. You probably won’t earn a lot of interest on your cash - in this climate of low interest rates -, but having your savings in another account does make accessing the cash more difficult. If you have an offset facility attached to your mortgage, you could put the cash into this. Or you could try Westpac Life. The savings account allows you to save for different goals without having to have separate accounts, and offers a competitive interest rate.
You could invest in property. This is potentially a riskier strategy but it could bring greater returns. Of course, there’s the capital outlay to consider and the fact that if you need the cash, you might have have to sell the whole asset which takes time and isn’t necessarily very flexible.
Australian Government bonds, which can be traded in a similar way to shares, could be a more flexible option for your cash. Bonds are a sort of IOU. You loan your money to the government and it repays that loan with interest payments. (There are also corporate bonds.)
For example: “Exchange-traded Treasury Bonds are debt securities with a fixed face value (the amount you will get back at maturity). They carry the same annual rate of interest over the life of the security, payable every 6 months.”
“Exchange-traded Treasury Indexed Bonds have a face value that is adjusted for movements in the Consumer Price Index (CPI). Interest is paid quarterly at a fixed rate, on the adjusted face value. This means the amount of interest you receive will vary from one quarter to the next.”
Both these bond options are:
Low risk - You will always receive the face value of the bond if you hold it until maturity;
Provide regular income - You'll get quarterly or half-yearly interest payments;
Are easy to buy and sell - You can buy and sell them whenever the ASX market is open.
Mutual Funds and ETFs
Moving up the risk scale, there are mutual funds. These are investments that comprise a mix of stocks and/or bonds.
Exchange-traded funds (ETFs) are similar to mutual funds but they do not have a fund manager and offer lower investment fees.
Stocks and Shares
Buying and selling shares on the stock exchange might be for you. However, if you’re like the three in four people surveyed by the comparison site Finder in 2017, you’ve probably never invested in shares knowingly and have all sorts of reasons for why. (Finder also found that of those who have given shares a go: men were more likely to have than women.)
So, what’s stopping people from investing in shares?
According to Finder’s survey, barriers to entry include lack of cash, and the high costs involved in buying and selling shares – minimum balances, etc. Not knowing how to trade shares is another significant obstacle for people.
The ASX runs free online courses in share investing, corporate and government bonds, ETFs, etc. These can help demystify the process and provide you with basic information and knowledge if you are considering these riskier options.
Utilising fintech and robo advisers (digital financial advisers) is another path you could explore. ’Fintech’ (financial technology) describes companies that provide online, automated financial advice to investors. Robo advisers provide automated financial advice or investment management online. They provide digital financial advice based on mathematical rules or algorithms, and can build a portfolio of investments for you that’s tailored to your needs and risk profile. In line with that profile it will rebalance and manage your investments over time.
All this is done at a relatively low cost but you do have to provide information about yourself, including your finances, so the robo adviser can work out what your level of risk is and where to invest your money. Investment is normally made into ETFs and there are management fees.
Any sort of investment portfolio is subject to market fluctuations. You will also need to pay tax on all realised capital gains in any investment you make. There are fees associated with your investment portfolio and it is worth working out what level of cash you need in the portfolio to make the management fees reasonable.
This article represents the views of the author and not necessarily that of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714. This information is intended as factual information, and not as financial advice. It is an overview only and it should not be considered a comprehensive statement on any matter or relied upon as such. You should consider seeking independent professional advice before acting on any matters set out in the article.