IF there’s one good thing to come out of the global financial crisis, it’s that we’re improving our saving habits.
In late November, Mr Glenn Stevens, Governor of the Reserve Bank of Australia (RBA) gave a speech to a group of economists. He talked about the current resource boom we’re experiencing and how it compares to past booms. And among all the economic predictions, estimates and analysis, one particularly interesting fact, to me anyway, stood out. Australians have re-embraced the notion of saving.
According to Mr Stevens, Australians are saving between 9% and 10% of household income. It’s a massive about-face from the situation of five years ago when household saving was minus 1%. In other words we were spending more than we earned by racking up debt.
The news that we are tucking away solid amounts of money has largely slipped under the radar. But it’s well worth celebrating.
The importance of personal savings cannot be overestimated. It provides a pool of funds for emergencies, and a source of cash for investing to build wealth.
Savings can also be used to pay off debt, and at a time when interest rates are tipped to climb, reducing debt makes a lot of sense.
One of the great things about saving is that you don’t have to tuck vast amounts away to grow a reasonable pool of money.
As a guide, saving just $20 each week into an account paying 6% interest could see you build a nest egg worth around $6,090 in five years.
Make that a $50 a week saving habit, and over the same period you’d accumulate about $15,220.
It’s important to get a decent return on your savings. A quick check of comparison website Rate City (www.ratecity.com.au) shows some of the top rates are available on online savings accounts with UBank (6.51%), Citibank (6.45%) and RaboDirect (6.4%).
These rates may not sound especially high but seen in the context of home loan interest rates they’re actually pretty good.
Three of the cheapest standard variable home loans are from Collins Home Loans (6.72%) and Newcastle Permanent and State Custodians both charging 6.74%. It’s quite remarkable that there’s a margin of only 0.21% between the highest rates on deposit and the cheapest home loans. It goes to show how much lenders need our savings as a source of funding.
That makes it worth starting a personal savings regime. Tucking away small amounts regularly is a lot more achievable, and effective, than saving large amounts infrequently.
Remember the example of saving $20 each week? If you took an alternate approach of putting $80 into a savings account once a month, at the end of five years you’d end up a pool of about $5,690. The difference of $400 arises because on average there are more than four weeks in each month so saving weekly is a painless way to save slightly more. And over time you get greater returns thanks to compounding interest. An effective strategy is to save a little and save often.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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