This article by Cameron Micallef was published in NestEgg on 11th September 2020.
Australians are more likely to have surplus due to COVID-19 restrictions than to be actively saving money, a financial planner has said.
According to results released by the Reserve Bank of Australia (RBA), households are now saving 5.5 per cent of their income.
However, Creation Wealth senior financial planner Andrew Zbik questions whether this is Australians saving money or simply a surplus left at the end of the month.
“‘Savings’ is when you deliberately put money aside to build a cash reserve for a new car, investments, your next holiday or to accelerate your home loan repayments,” Mr Zbik said.
“A ‘surplus’ is when your expenses are lower than your income.
“Savings is putting an exact amount of money aside each week, month or year. Surpluses just happen – sometimes they don’t.”
Mr Zbik said most Australians are currently running a surplus instead of actively saving money.
“They may just happen to be accruing some money each month after their income has been used to cover expenses. There is nothing deliberate about running a surplus,” Mr Zbik said.
Mr Zbik’s top tips on how to be deliberate about saving money:
- Use a budgeting app.
Use a proper budget tracking tool such as MyProsperity (which we use with our clients at CreationWealth). This will help you understand where you spend your money. Once you know exactly where you spend your money, it will help you better prioritise what spending habits you will change.
- Break down your net household income into these four broad categories:
a) Savings: Be deliberate and choose a set amount of money you will put aside into a savings account each pay. For example, this may be 5 per cent. This idea here is this money goes into your savings account before you even have the chance to consider spending it on core or discretionary expenditure items.
b) Core Expenses: Know what your basic living expenses are. For example, the cost of running your home (utility bills, rent or mortgage payments, council rates etc), the cost of putting food in your mouth (weekly grocery spend… OK, some freedom here to choose if coffee fits in this essential category) and essential personal items (such as basic clothing purchases, healthcare and personal grooming). This is the bare basics that you need to have shelter over your head, food in your mouth and have clothes on your back.
c) Discretionary Expenses: Know where you spend your money on the fun items. This includes entertainment, hobbies, eating out, holidays. Knowing the difference between core and discretionary expenses can be very helpful for planning your financial future. It breaks down the goals to work towards in building enough superannuation and investments to generate a passive income. First base is to have enough passive income to cover your core living expenses.
d) Surplus: Ensure there is still a little surplus at the end of each month. Our cash flow commitments are not always beautifully divided into 12 instalments over 12 months. Some months you will have a bit of cash left over, other months will be negative, but the previous months surplus will have that covered already.