Savings

1) Those who spend first and save what’s left

2) Those who save first and spend what’s left

It’s the ability to save first that distinguishes the independent and successful person from the dependent and unsuccessful who do not have any reserves. It is about the choices we make on all the little decisions each day that can move us forward to create financial independence.

Look at the structure you have your pay credited to your bank account so you can “Pay your self first”. Firstly have your income direct credited to a savings account. Now have a set amount automatically transferred to a transactional/cheque account to pay all the bills. The money left behind will accumulate over a period of time. Compound interest helps money grow at a faster rate with interest accruing on the total previous balance (savings plus interest). This is how your money starts to really work for you. Starting off with an initial savings account, check the criteria with the bank to assess the fee structure, so you are not penalised with having automatic payments going in and out each month.

As your money accumulates, the next step is to transfer lump sums of $500-00 into a Term Investment if this allows you to be rewarded with a higher interest rate. The money could be placed for 90 days at a time and added to at the end of the period from your extra accumulated money and reinvested.

This method will allow you to accumulate savings for short term goals (1 – 2 years). It can also be used for long term goals and placed into other asset classes like managed funds. By implementing a regular savings programme you will be able to provide security for your self and your family.

The benefits of starting a savings plan early can be seen in the end result. Lets look at an example of Chris and Jenny – Chris was having a great time at university, he had a part time job and enjoyed spending his extra money and had purchased his first car. In the future Chris wanted to travel before he thought about saving for the future

Jenny was also doing tertiary education, and had a part-time job, and she had managed to accumulate $10,000 by the time she was 25 years old. She decided to put this away in a Global Share Fund as an initial step towards her dream lifestyle (when she finally left work) If the share fund averaged 7% Gross for Jenny, Compound interest would help her fund almost double in 10 years. If Jenny left her money invested until she was 65 years old with out investing any more to this amount, her fund could reach $149,745. (less any personal tax liabilities)

Now if Chris made a decision when he was 45 that he also wanted to accumulate the same sort of fund by age 65 years old, his contributions would be really different. To reach the same target as Jenny, Chris would need to put away $287-45 every month for 20 years. That is a total of $68,988 of earned income. $58,988 more than what Jenny needed to save initially by starting 20 years earlier.

By starting saving even a small amount, compound interest and time can help you achieve a greater target than putting it off today and making a rush at the end to try to catch up. Your own circumstances maybe different from either Jenny, or Chris in our example. It is always advisable to speak with a Financial Planner regarding your own circumstances, this example is not intended as specific advice, rather as an example of the benefits of compounding interest.