02 Feb “I don’t earn enough to save money” The five lies you are telling yourself
We accountants sometimes talk more about investing than we do saving. But learning how to save money is the first step in making your money grow. And if you don’t save, you don’t have anything to invest anyway!
We hear a lot of excuses from people of all ages who haven’t mastered the art of saving. Here’s our top five -and how to overcome them.
- “I don’t earn enough to save”
Deciding the time that’s “just right” to save is pretty much impossible. Chances are, you’ll never feel like you’re earning enough to save – so “never” becomes the best time to start. Someone who thinks they can’t save $50 when they’re making $500? They’re probably not going to think they can save $1,000 when they’re earning $3,000. If you’re not a good saver, NOW is the time to start. No matter how small the sum, set aside a small portion of your income to cultivate the habit of saving.
- “It’s my/his/your birthday/wedding/vacation…”
Whether it’s a family trip, a birthday, a holiday, a wedding, there’s always something to take a serious bite out of your budget. These are “one-off” expenses that are anything but just-this-one-time. Of course, unless you live in a cave, you can’t avoid these kinds of expenses. But you can control them, by setting a budget… and sticking to it. And to play it safe, leave your credit cards at home and just go with a reasonable amount of cash – when it’s gone, it’s time to go home.
- Why save when interest rates are so low?
Low interest rates can kill the motivation to save. It hurts when your money is earning 0.01 percent (if that) in the bank. But remember, you don’t grow wealth by keeping money in a bank. And those kinds of savings are meant to be for emergencies – not to grow rich. If you’re looking for interest, the magic of compounding interest works much better with stocks that pay a healthy dividend.
- I have other liquid assets to sell when I need to
Buying low and selling high is great when you can do it. But sometimes an unexpected large expense can force you to sell to raise cash at just the wrong time – when a price is lower rather than higher, for example. There’s no shame to having cash. Its value won’t fall much, it’s there when you need it, and it’s a great hedge against falling markets.
- I don’t have to save – I make plenty of money
Many people develop big spending habits in anticipation of their current income staying the same – or rising – indefinitely. Or they splurge on something in expectation of a bonus in December, or a raise at some point soon. Status Quo Bias is an enemy of investors. It’s also an enemy of savings. Perhaps tomorrow you’ll earn more than you’re earning today. But maybe things won’t be just like this, and maybe you’ll lose your job or break your leg or get a divorce. And if you have a lifestyle that can only be supported by a big income – and no savings – you could be in for a lot of trouble very quickly.
The 50/30/20 Rule
One simple way of imposing a savings discipline on yourself is the 50/30/20 rule. It works like this:
- 50 percent of what you earn (post-tax) goes towards your needs… housing, food and basic services.
- 30 percent of what you earn is put towards your wants… entertainment, holidays and leisure.
- And the remaining 20 percent goes towards debt repayment, retirement contributions and – of course – saving.
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
Partner – Murray Bridge