Having to save a sizeable sum of money can prove to be stressful for most of us. Most people’s current lifestyles and financial decisions make it practically impossible for them to accommodate a savings base into their budget.
For instance, a survey conducted by ME Bank in 2019 found that only 1 in 4 Australians have less than A$1,000 in personal savings. Personal savings is an even bleaker story in the US, whereby nearly 70% of the population have savings less than US$1,000. These are frightening statistics if you consider the current global landscape, whereby most people are left unemployed or temporarily laid off due to the global pandemic.
The ME Bank survey cited weak wage increases as one of the reasons for the lack of savings by a quarter of the Australian population (we are ranked 22 out of the top 100 countries). However, the other side of the equation involves current spending levels as well as current debt levels. While I acknowledge that Australia is high on the cost of living index (ranked 14 out of the top 100 countries, above the UK and the US), there is undoubtedly a dependence on using debt to fund current lifestyle choices and preferences.
I’m all for debt as a growth vehicle. As mentioned in my other post, I would not have been able to build my property portfolio if I didn’t have access to debt. However, I constantly focus on my debt levels and ensure I maintain sufficient equity such that the debt will be repaid if disaster strikes. In my opinion, I do not believe this thought process is widely accepted throughout the population, particularly those with absent savings.
I have encountered those who take out short-term, high-interest personal loans to fund discretionary spending such as vacations or presents for the family. When I asked those people why they chose this approach, their answer typically was that they couldn’t deprive their family of these pleasures, and that it was critical that they have these items now for their own happiness and sanity.
Perhaps I’m in the minority here, but I can’t comprehend putting myself through future financial hardship solely to enjoy temporary happiness. My family and I did not take a vacation together until five years after arriving in Australia, because we simply didn’t have any savings to support it. That didn’t lead to any animosity in my household – in fact, when we eventually went on that family vacation, we had a greater appreciation for the experience.
In my view, our society has an unhealthy reliance on personal debt. It fosters a culture of ‘paycheck-to-paycheck’ living, placing the individual in an extremely precarious situation should an unexpected event or expense arise. Given the public stigmas associated with discussing personal finance, coupled with the fact that there is no formal school education regarding the use of credit, it is understandable why a quarter of Australians find it difficult to save. However, despite the fact that wage growth may be sluggish, I maintain that it is possible to incorporate saving habits into any budget.
While this post is intended for saving techniques for a first home deposit, I adopt these savings approaches throughout my life. As such, these techniques have application to other financial decisions or life aspects. Further, by consistently applying these techniques, the goal is to slowly transition towards strong financial hygiene practices.
To use the old adage, the two events that are absolute are death and taxes. We are taxed across every aspect of our life, whether it be as an employee, employer, consumer, investor or retiree. Most of us are comfortable with our employer withholding an amount of our salary to pay taxes on our behalf. What I propose is that more of us should view that remaining portion as also being ‘taxable’, but in the form of a savings rate.
I invite you to consider the following. We will typically deposit our salary either in a checking or savings account, or against an investment. What if you assign a nominal ‘tax’ rate to that salary before depositing it into your financial assets? That ‘tax’ will then be deposited into a high-yield savings account that will accumulate and compound over time. By making this a mandatory exercise, you change your mindset from saving being a discretionary action, to one that is compulsory. Depending on the savings ‘tax’ rate that you use will also influence your overall spending decisions, given you have less income at your disposal after paying away the savings tax.
This approach can also be used as an added incentive to curb certain behaviours. For example, if you are trying to stop spending so much money on a discretionary item (e.g. clothing, alcohol, etc.), you should tax yourself on these purchases by depositing a fraction of the purchase price to your savings account. For example, if you can’t kick the jeans buying habit, and you typically pay around $70 per pair, you should aim to save at least $2.10 every time you purchase a pair of jeans (representing a conservative 3% savings rate). Over time, you’ll slowly wish to increase that savings rate, and invariably reduce your expenses to achieve that goal.
As a caffeine lover myself, I don’t mean to stop consuming coffee altogether. I take objection to those who freely pay upwards of $4 per day to have a coffee, an item that is arguably one of the most highly price inflated products in our current society. To put things into perspective, a $4 daily coffee habit translates to $20 a week… or $80 a month… or $1,040 a year. That represents more than what a quarter of the Australian population is able to save, spent on one cup of coffee a day.
The paid coffee habit is emblematic of a societal flaw. We expect the best quality and experiences, despite our personal affordability. We place too high a value and importance on these items, such that it seems impossible to save.
When I assumed a managerial role, I tried to break the cycle and purchased a Nespresso coffee machine for the office employees to use. The Nespresso pods certainly have a healthy profit markup applied to them, however I felt this was a happy medium. However, this did virtually nothing to slow down the paid coffee habit.
If paid coffee is something you just can’t live without, find something else in your life that is discretionary in nature but can be reduced in favour of your savings. For example, instead of going out for lunch every day, pack a sandwich and some fruit. Walk or cycle to work instead of taking your car or public transportation. Better yet, don’t own a car because you recognise it is a money pit that will only lose you value when you eventually sell it. Some of these examples may seem extreme, but should hopefully get you thinking about your current lifestyle choices and what you can do without.
Another study from Budget Home Direct Insurance found that, of 1000 people surveyed, 48% percent won’t pay off their credit card ending balance each month. I appreciate that there are personal stories which make up these numbers, however this percentage is simply way too high to be excusable. In fact, it highlights our society’s lax attitude towards personal credit and the fact that the high penalty and interest rates are not a sufficient deterrent on their own.
When applying for a home loan, your loan officer or bank manager will take into account your personal debt levels and repayment habits. A failure to manage your personal debt situation only serves to limit your chances of obtaining the mortgage you need, or a suitable mortgage interest rate.
One option to control your credit spending is to set penalties for yourself. For instance, if you are unable to pay off your balance for a given month, you should try to not buy anything on credit for the subsequent month. Alternatively, if you are expecting to incur large expenditures on your credit card, you should aim to have the money already saved up before incurring the expenditure. If it is an expenditure that you are incurring on behalf of others, make sure to be reimbursed by them first before charging the expense, so you don’t take on the credit risk.
Credit card churning has also become a prevailing trend for the younger generations, whereby individuals open up multiple credit cards to get access to credit card points and other benefits. While the benefits are certainly attractive, I advise against this strategy as it only favours those that possess sound financial hygiene practices and do not heavily utilise credit. For those that experience personal credit issues, this approach is very dangerous and can only serve to move you further away from your ability to save.
In addition to what has already been mentioned, you should strive to set short-term personal goals for yourself, based on your current objectives and wants. For example, if you plan to save for a home deposit of $20,000 by the end of the year, work backwards to determine what that translates to in terms of a saving amount per week, or fortnight, or month. If that number seems too high and presents severe challenges to your basic survival needs, revisit the time horizon on which the milestone is set, or evaluate whether you should save a smaller portion and seeking to find the remaining deposit amount from other channels.
It is crucial to note that you have not failed if you are unable to meet the goal by the set timeline. The yardstick of success here is if you’ve commenced the savings process, and that you’ve started to incorporate healthy savings habits towards that goal.
I personally place greater emphasis on debt/expenses than on income, as you typically have a greater level of control on your outflows compared to your inflows. However, what this blog post didn’t cover is finding other options where you can maximise your income, whether it be through side hustles or learning a new skill to improve your promotion chances or hiring potential. However, this thinking is somewhat cyclical, in that if you are able to save more, you are able to invest more resources towards yourself and your income producing goals.
Saving for that home deposit can be a stressful and daunting task if you are not used to large amounts of personal savings. However, by employing a handful of savings techniques on a consistent basis, you will be on the right track towards realising your dream of owning a home.
I would love to hear from you on how you’ve saved for your first home deposit. Please feel free to leave a comment below on your tips and tricks to save!
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.