Author: Ryan O’Grady, Financial Planner at Navigate Financial Group
Developing a savings plan
Many clients that I meet would like to save more money. Most of them will actually admit to me that they have the capacity to save but they either lack the discipline for regular savings or simply consume any money that they have sitting in their day to day account. In conjunction with these issues,, many people also fund their lifestyle through personal loans and credit cards which can put them in a cycle of constantly paying back debt without getting ahead. Does this sound familiar?
Some key points to consider
Complete a Budget
The term budget is probably the dirtiest word in financial planning. Call it what you want but unless you know what money is coming in and what money is going out, you will never be able to determine how much money you can regularly save. Usually it takes maybe 30 min to complete a fairly detailed budget, if you cant allocated this 30 min to begin with, how is it possible to maintain the disciple required to save a regular amount over a long period of time.
One of the most important aspects of planning anything in life is to understand what your goals are. When developing a savings plan, you should not only know an amount of money that you can regularly save but also a timeframe in which you are to save for.
Savings goals should generally include:
[list-ul type=”square”][li-row]Regular savings amount[/li-row][/list-ul]
[list-ul type=”square”][li-row]Reason for saving[/li-row][/list-ul]
Don’t try to save everything straight away
A major downfall of a lot of people I see is that they try to save too much too quickly. If you lack the discipline of putting money away regularly (and not touching it!) your chances of saving every extra dollar of monthly surplus is all but none.
I personally suggest the following to many clients: “Start small, gain consistency and increase regular savings after a review period”. This means that if you complete a budget which shows you have $500/month surplus. Rather than trying to put this $500/month away straight off the bat, start with an amount of say $200/month. Why? When people complete budgets they often forget to account for little things like haircuts, extra snacks at the service station etc. I always like to allow a small margin for error. The, the most important point however is to build discipline. It will be much easier for someone to start putting away $200/month of a $500/month surplus giving them some wiggle room begin with. This amount can be reviewed after say 3 months to assess how comfortable the person is with the amount. If they are feeling that comfortable with the original $200/month, this can then be increased to say $250/month and then again review in 3 months. I find this is an extremely effective way to not only develop discipline but also improve savings over time.
Saving in an bank account which is linked to transaction accounts
In this day and age, a person’s disciple not to touch savings is thoroughly tested where money can be transferred on a mobile device in seconds. If you are putting your long term savings into an account which is linked to your everyday transaction account, this can be a recipe for disaster (especially with Christmas holidays fast approaching).
There are a large amount of savings platforms available for people to put long term savings away rather than just sticking with a cash account.
A common misconception for people saving is that a cash account is the only option in which to invest long term savings. There are a variety of alternative investments for regular savings plans and depending on your appetite for risk and investment time frame can provide solid annual returns.
Many companies will offer services such as managed funds which allow people to start with a small deposit of approximately $2000. You can then choose to make deposits at regular intervals usually as small as $100 each time. One of the main benefits of managed funds is that they cater for people of all risk categories from very defensive investors preferring cash and bonds all the way up to things such a geared share funds. It is extremely important that you consider your investment time frame, risk profile and possibly seeking professional advice before investing savings.
John and Jane are in their late 20’s, both working and would like to start saving. They both feel like they are treading water and are not sure of options they have. The couple is not really sure of how much money they can save each week however they know there should be something left over.
Step 1 – Cash-Flow strategy
After completing a monthly budget, John and Jane realise they can “comfortably” put away $400/month into long term savings as they have a surplus of around $750/month.
Step 2 – Goal Setting
John and Jane would like to save for a deposit on a house. They know that they can save $400/month and would like to know how much they can save for 10 years.
Step 3 – Projections
The below table shows that if the couple are able to put away $400/week for 10 years, with an annual return of 6.5%, the projection shows the final savings to be $67,361. Of course this is an estimating tool but given historical performance of certain asset classes, this scenario is more than achievable with a balanced investment profile.
The past performance information provided is based on the following assumptions:
- Annual returns are based on a 70% growth profile over a 10 year investment period
- The above example is illustrative only and is not an estimate of the investment returns you will receive or fees and costs you will incur.
- Past performance is not a reliable indicator of future performance.
Step 4 – Start working towards the goal
John and Jane feel that the $67,000 in ten years will be enough for a deposit on a home. They also feel that through constant review of their situation, if they can increase the monthly savings amount each year, this will help them achieve their goal earlier than planned.
In summary, it is vital that if you plan on developing a long term savings plan:
[list-ul type=”square”][li-row]Understand your savings goals.[/li-row][/list-ul]
[list-ul type=”square”][li-row]Complete a budget to ensure you know your surplus income[/li-row][/list-ul]
[list-ul type=”square”][li-row]Start saving a “comfortable” amount[/li-row][/list-ul]
[list-ul type=”square”][li-row]Develop an investment strategy that fits with your goals[/li-row][/list-ul]
[list-ul type=”square”][li-row]Seek help from a professional if you need assistance[/li-row][/list-ul]
Authorised Representative, AMP Financial Planning
Navigate Financial Group Pty Ltd (ACN 128 056 002), is an authorised representative and credit representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee.‘This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.If you decide to purchase or vary a financial product, your financial adviser, AMP Financial Planning Pty Limited and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.’
(Note: Calculations were completed using the Moneysmart.gov calculator and do not take into consideration fees. The figures used are just an example and should not be used for any personal assessment. The calculator can be found at the following link https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/compound-interest-calculator )
The past performance information provided is based on the following assumptions:
[list-ul type=”square”][li-row]Annual returns are based on a 70% growth profile over a 10 year investment period[/li-row][/list-ul]
[list-ul type=”square”][li-row]The above example is illustrative only and is not an estimate of the investment returns you will receive or fees and costs you will incur.[/li-row][/list-ul]
[list-ul type=”square”][li-row]Past performance is not a reliable indicator of future performance.[/li-row][/list-ul]