Budgeting: Effie Zahos 6 ways to get fiscally fit

The good news is that you can do it without breaking into a sweat

Australians seem to have lost the savings habit, with 25% of us saying we don’t have a regular plan. It does require some effort – but not the physical kind. Here’s how to whip your finances into shape.

1 SET UP SOME BUCKETS

If you’re one of the millions of Aussies who struggle to balance the household budget, there is a simple but effective way to save. It’s called the 60:30:10 rule. You simply divide your income into three buckets – 60% of earnings each month should be spent on essentials (mortgage, rent, food, electricity, telco and so on), 30% on things you want or unexpectedly need and 10% goes towards your savings. There are variations on this, such as 60:20:20, but essentially they all work the same way.

This bucket system may not work for everyone but by setting up separate accounts and earmarking them with a purpose you’re in a much better position to stay on track. If you’re spending more than 60% of your income on essentials, take a good look at your fixed recurring costs. Easier savings can be made by comparing your mortgage, phone plan, health insurer and even your streaming services such as Stan or Netflix. Don’t pay a “lazy tax” because you can’t be bothered to compare.

2 GO FOR GROWTH

Leave your money in a bank account and one thing is for sure: you won’t get rich. To avoid your savings going backwards you need to dial up the risk. Over the long term, shares and property are far more effective at creating wealth than cash or fixed interest.

The good news is that through a managed fund or an exchange traded fund (ETF) you can invest indirectly in these asset classes with as little as $500. In a managed fund the fund manager buys and sells investments regularly in an effort to outperform a specific market index, such as the S&P/ASX 200. An ETF, also known as an index fund, simply buys a portfolio of assets that mimic an index.

More details can be found at moneysmart.gov.au. Vanguard took out the title of Best ETF Provider in Money’s 2018 Best of the Best awards. Its Australian Shares ETF has returned 9.44%pa over five years and 9.12%pa since inception.

3 FEED YOUR SUPER

There are probably a million other pressing money issues you have to deal with right now before you can even think about the future but take the time now to review what will be one of your biggest assets. Whatever your thoughts are on super it still is (for most of us) one of the most tax-effective wealth-creation strategies. On a 39% marginal tax rate (including 2% Medicare) you’d pay $390 on $1000. However, if you salary sacrifice the $1000 into super you’d pay just $150 because contributions are taxed at 15%. Why give the tax office an extra $240 when you can “pay yourself forward” by putting it into your super fund?

If you’ve got a spare $10 or so then consider salary sacrificing. Let’s say, for example, you’re 24 years old and you give up one green smoothie per week and instead pop that into your super. Assuming 5% growth, you’ll enjoy an extra $70,000 in your super fund when you retire.

4 OWN A HOME DEBT FREE

Having a home forces you to save and it provides lifestyle benefits. Focus on paying off your home loan by putting your savings into your mortgage offset account. Not only will you reduce the term and interest on your home loan but you won’t pay tax on the interest earned. And make no mistake, having a fully paid-off home is the most important strategy for retirees and anyone heading into retirement. It’s the only asset not included in the test for a part or full age pension and the only investment that is free of capital gains tax when you sell. Set up your buckets and link them as offset accounts to your home loan. This way you’re saving and offsetting the interest on your home loan at the same time. Some lenders allow up to six offset accounts to be attached to your home loan.

5 SAVE A LITTLE, SAVE OFTEN

What did you get paid last week? How much of it have you got to show for it this week? We tend to spend all that we earn and most of us can justify it too. The secret to building wealth is pretty simple: spend less than what you earn and save a little often.

Save $2 a day during your 20s and you’ll have $30,624 by the time you’re 40 (this assumes a 7% rate of return); $5 a day will turn into $77,000 and $50 a week will become more than $100,000 – al thanks to the magic of compound interest. A budget is the best tool you can use to help you spend less than what you earn. To help kickstart your savings sign up for Money’s 8 Week Savings Challenge at 8wksaver.com.au.

6 PROTECT YOURSELF

The most valuable asset you have is your ability to earn an income. If you’re 25 now and earning $50,000 a year, you have the potential to earn more than $3.8 million between now and 65. So while you might not need life insurance, think about income protection, which pays up to 75% of your income if you’re unable to work due to sickness or disability. Premiums are tax deductible.

First, though, check if you have income protection through your super fund. Also check with your fund first before taking out any other insurance. Don’t be afraid to take advice if you need it. Hire a good financial adviser, accountant or property expert. Few people have the knowledge to handle all aspects of investing so spend a little money to acquire some.

The most valuable asset you have is the ability to earn an income, so protect it