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Financial Spring clean
01 September 2020
I check my bank balances regularly, but I don’t deep dive into my spending habits all that often. I always have enough to pay my credit card debt off and my mortgage on time so, I figure, why go into my spending in detail. However, recently, it occurred to me I should try and put a bit more in my Super.
I trawled through my cards and savings statements to establish how much I was saving.
Imagine my horror, having budgeted out my weekly spending, to find that at some stage in the past 9 months I’ve begun spending around $40 more than I earn.
Why hadn’t I noticed the shortfall?
One reason: I have a bit of a savings buffer for presents, and because we haven’t reached Christmas yet, I haven’t had to find the money.
However, when we do reach December, presents are looking thin on the ground.
How to fix my shortfall?
It's time to identify what my ‘Needs’ and ‘Wants’ are and cut back on some things.
I admit, combing through bank statements to uncover where I'm spending money is tedious, but not particularly hard to do. The second step - freezing the unnecessary spending - is hard.
Because I 'need' my coffee and don’t want to have to prepare lunch for work. I look forward to eating out. I love the convenience of driving places, and so on.
(I suppose I could drop the gym membership - $900 a year - and exercise en plein air.)
Freezing discretionary spending (and let’s face it, that’s a major portion of most people’s spending) is difficult, but it will mean I save.
To get motivated I have to reset my priorities. Will 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. In fact, 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. That number was inspiring and didn't seem all that difficult to achieve, especially when broken down into buying one coffee a day, lunch at home, replacing gym with walking and online exercise programs, dinner out once a month...
The savings are going into my Super.
If Super is not your thing just yet (although it could be something to consider, especially as a woman), here are some other ways you could make those savings work for you.
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 a mortgage with an offset facility attached, you might consider putting the cash into this.
Property investment is potentially a riskier strategy but may bring great 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. This process takes time, making property a more inflexible investment.
Australian Government bonds, which can be traded in a similar way to shares, may 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 or income from 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.