Which comes first – Saving or Investing?

As a nation, both our level of savings, as well as our level of investment, are higher than many other developed countries’1. But over the last five years there has been a shift in the relationship between how much we save and how much we invest. So what does this say about how we should approach saving and investing in the future to make the most of our dollars?

According to the Reserve Bank of Australia (RBA), the amount we save as a nation started to increase from the mid-2000s, after a period during which the amount we saved started to fall.1 accordingly, from 2000 to 2010 the ratio of national net saving to GDP rose by three percentage points, from 4.9% to 7.9%.2

Interestingly, and although it might seem counterintuitive, saving and investing are not mutually exclusive. Just because we’re now saving more than in the past doesn’t mean we’re investing less. In fact, the RBA has also noted our high levels of household, as well as corporate, savings have allowed Australia to fund substantial investment in the mining sector.

So how do you get the balance right between saving and investing to establish a firm financial foundation? First, let’s take a look at the principles of saving.

The key is to consistently set funds aside beyond what is needed to pay for bills, groceries, school fees and other payments. To do this, it’s important to understand the true cost of these commitments. Once you know how much you need to set aside to pay for your ongoing expenses, you can work out how much you have left available to save. A rule of thumb is to aim to save 10% to 15% of your after-tax income.

This is often more difficult at certain stages of your life – for instance when you start a family. When this happens you might find you don’t save as much as during other stages of your life. Don’t be too concerned – the idea is to develop a habit of saving throughout your whole life, rather than be too focused on the specifics of the amount.

So what’s an effective way to save? One of the most beneficial strategies is salary sacrificing into superannuation. This may allow you to make a tax-effective contribution to superannuation, subject to certain thresholds. It’s a way of increasing your nest egg, while also reducing the tax you pay.

Another saving strategy is paying your mortgage through an offset account. This allows you to use your savings account balance to reduce the amount you owe on your loan, which could lower the interest you pay on your mortgage.

These are just two ways you can help increase your savings. There are lots of other initiatives you can also put in place to help build up the value of your investments over time.

The idea is to work with your financial adviser to put together a comprehensive financial plan that incorporates the right savings and investment strategies to help you achieve your goals, taking account of your individual circumstances and life stage so you can make the most effective use of your financial resources. Contact your financial adviser today.

 

Sources
  1. Bishop, James & Cassidy, Natasha ‘Trends in National Saving and Investment’, RBA, 2012
  2. ‘Measure of Australia’s Progress, Australian Bureau of Statistics (ABS),2010
 Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

10 Steps to financial security in your 30s

Being 30 today is very different from what it may have looked like for our parents. While many baby boomers were married with children by the 25, people today are settling down later, taking time in their 20s to establish their careers and explore the world. This makes financial security potentially both easier and harder to achieve. While 30-somethings today have more time to establish themselves career-wise, they’re less likely to have stayed in the same job, or to be on the property ladder. We’ve put together 10 tips for becoming – and staying – financially secure in your 30s.

1. Get your super sorted

Your 30s is the time to get serious about your super. If you’re anything like the majority of people your age, you probably spent a much of your 20s switching jobs, and super is probably all over the place, accruing fees and getting lost. Consider putting it together and speak to a financial adviser about the best options for your future.

2. Advance your career

You’ve built the skills in your 20s, now put those skills into practice and start moving towards those career goals.

3. Save

Put as much as you can away for a sunny future. If you’re planning a family and don’t yet have one, your disposable income is probably at its highest so use it to your advantage and work out a savings plan.

4. Invest for the future

If you haven’t already, start thinking long-term. Do you have plans for a holiday house? Do you want to spend time travelling? When do you want to stop working? How much money will you need? It might seem like a long way off but the sooner you start the sweeter those margaritas on the beach will taste in holiday house and no longer need to work.

5. Make a budget

Once you have your goals more firmly set, you can figure out a budget that helps you live within your means and achieve the things you want to achieve. Be realistic, and be consistent.

6. Start climbing the property ladder

If buying property is important to you, then your 30s are a good time to do it. Be realistic about what you can afford to pay on a mortgage, do your research and consider taking advice from a financial adviser. Even if the property is purely for investment purposes in a place you never plan to live, it will get you started and may give you the equity and standing to buy your dream home further down the track.

7. Protect your most valuable asset

Life insurance might not seem the most fun way to spend your money, but it’s important. If you’re in a long-term relationship then it can take the burden off your significant other and children should something happen to you, and if you’re single it can provide injury insurance in the event that serious illness prevents you from working and meeting your financial obligations. It’s a way that helps you keep affording the life you plan for.

8. Pay down debt

It’s time to get serious and pay down that debt you accrued in your 20s. Whether it’s paying off your HECS debt or finally knocking that debt from the gap year you took after university, your 30s are the perfect time to focus on getting out of debt. Also watch the credit cards. Keep them in check and try to pay them fully every month.

9. Learn to be your own advocate

Whether it’s with your accountant, your employer or business partners, use the confidence and skills that come with having worked your way up in your 20s. Advocate for yourself and negotiate a raise, a good deal or a better rate – take matters into your own hands and see how empowering it can be.

10. Have a plan

It doesn’t have to be the plan you had when you graduated university, nor does it have to be the plan your family or society has for you – but it’s a good idea to have one. Financially, your 30s can be the power years for making your dreams come true, but you need to be organised in order to make the most of them.

Contact us today to find out how we can help you make your dreams come true!

 

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

The Little Things… Coffee and the power of compounding returns.

OFM

I thought I’d take a moment to explore the impact a few simple- conscious- decisions can have on your wealth.

Now, don’t let the title fool you- I’m a coffee drinker, and not for a second will I suggest giving up coffee if you are too and it is something you enjoy… The repercussions could be far-reaching!!

Coffee I thought would be a good example, because it is a little thing

Are there ‘little things’ that you spend money on unconsciously, or could go without? ATM fees when your bank is on the next corner, a drink with lunch, taxi’s when you could walk or take the train, an item of clothing per month?

What power might a conscious change to a little habit have for you? Let’s take a look…

Using my coffee habit as an example, below I have illustrated the power of channelling that little bit extra to the mortgage or additional superannuation savings.

Extra Loan repayments- What a little extra could achieve…

  •     Take 5 years off the repayment of a $400,000 mortgage on  a 25 year term (i.e. pay-off in 20 years)
  •     Save $83,076 in interest costs over the life of the loan.

Graph

Click here to expand. Assumptions: $400,000 mortgage on 25 year term, 6% mortgage interest rate, foregoing $10 per day of ‘little things’

 

Powerful stuff, right? How does it work?

Well it’s not magic, and it doesn’t happen overnight. It takes a conscious decision to change a habit and put a little extra away…. The power of your money is then helped along by the compounding effect on your mortgage. What I mean by that is each time you pay off a little extra, your interest cost reduces so the next year you will pay off more of your mortgage with the same amount of money.

Let’s take a look at what happens when we add taxation benefits to the mix by making use of the superannuation environment.

Additional (Salary Sacrifice) Contributions to Superannuation- what a little extra could achieve…

  • Income Tax Saving of $1,408 each year
  • An increase to Superannuation investment balance of $513,966 over 25 years
Graph
Click here to expand. Balanced Portfolio Return Assumptions: Returns: 8.48%pa (3.98% growth, 4.5% income with 24.8% franking), Marginal Tax Rate: 37%+ Medicare levy foregoing $10 per day of ‘little things’ 

The above illustration is only showing the extra benefit your little bit makes over time. This is on top of your normal superannuation contributions!

 

To wrap up, I encourage you to take a moment to ‘take stock’ and consider the little things you could go without. Then plan how to best put your little extra to good use. Remember that the above illustrations are general in nature and it is important to consider your personal circumstances. The best advice is to seek professional, personal, advice.

Once you’ve found your little extra, contact me to see how the effects of compound interest/returns can help power your wealth.

 

I’ll leave you with a quote often attributed to Albert Einstein:

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

–          Albert Einstein (Supposedly)

Einstein or no, wise words to consider, and a powerful force.

 

Written by Yosha SteeghsWealth Adviser, Odyssey Financial Management

 

Discover how the inner circle can help you. Contact us today for a financial consultation.

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs.
Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.
Odyssey Financial Management is an authorised representative of Total Financial Solutions Australia Limited.