The Money Managers | In the News

Instant gratification seems to have replaced regular savings. The concept of “lay-buy” is a thing of the past. It seems charge accounts and credit cards have replaced short term savings plans. I haven’t heard of Christmas club accounts for many years. The Global Financial crisis is set to change all this.

Frivolous spenders need a wake up call. An accurate budget clearly compares our income against our spending. We can’t go on spending more than we earn. Preparing a budget can be a very confronting exercise, especially for those of us with poor money habits. Generating surplus income for savings after covering our expenses can be very empowering. Once we are generating a surplus, we can start target setting and plans can be set for future goals. Where surplus income is not enough to reach a specific goal in a desired timeframe, we have to cull expenses even harder.

Excess expenses decrease our savings ability. One solution some people use is to cut up the credit cards and change to a debit card. This can do wonders to instill discipline. If we invest time comparing interest costs and pay off high interest debt first we can gradually get our affairs in order. For some people removing the temptation to spend can help. We can remove access to easy money and carry less cash. Though all of these alternatives seem uncomfortable at first, they work for a lot of people.

Expense reduction requires in-depth analysis of what are essential items. We need to examine the cost of food, rent or mortgage costs, utilities and even school fees are things that need to be assessed. If any budget is too strict then it won’t be followed and it can have detrimental effects on our self esteem. We should try to ensure that at least one luxury item remains. If it is one that makes you feel good and stay healthy – like a gym membership, then it should stay in the budget. Expenses that are not a necessity can be curbed. Calling a budget a ‘priority planner’ can be a way of changing our attitude to it and give it a positive focus. This can help ensure we will stick to it when the going gets tough.

A car is often one of our more costly consumer items. The vehicle we drive is a good indicator of our money habits. Many people lease cars and upgrade them regularly to the latest model. As a car is a depreciating asset, this can be more costly than owning a lower priced car that may have less status value but may not impact the budget to anywhere near the same extent.

The real challenge with car ownership is to drive the cheapest one your ego can afford. It ‘pays’ not to care too much about what other people think. If our car is an unjustifiable expense, we could weigh up public transport options or consider riding a bike to work. Having one car in the family instead of two can make a huge difference to a family budget.

Once our expenses are in order, it’s time to address savings capacity. Savings capacity is something that is often hotly debated. There is a great book called ‘The Richest Man in Babylon’. It discusses the principle of saving 10% of our earnings. The benefits are clearly demonstrated. Money put to work earning interest, rent or dividends creates more wealth without more personal exertion. Saving a proportion of everything you earn can prove one of the most valuable lessons of life. Savings supplement income when needed, and also provide an additional income for retirement. The superannuation system is set up to capitalize on this and to do it tax effectively. Super is not the whole picture as other savings that are accessible before retirement are needed as well.

Savings for short term and long term goals should be kept separate. Targets for short term savings can be set and funds for this corralled into an appropriate account for when the amount is needed. This money should not be put in shares or property as prices fluctuate and there is a real risk this money can under perform over the short term. This has been abundantly obvious over the last twelve months. Short term money should be kept in a secure interest bearing bank account.

How much we earn should never determine how much we save. Even people on modest incomes somehow manage to save a small proportion of their salary if savings habits are formed early. Too many people on six figure incomes still spend more than they earn because of spendthrift habits and lifestyle. Having a budget, monitoring expenses and not compromising on savings goals are the keys.

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