Independence: the basics of financial fitness

30 Sep 2019 4 min read

We’ve talked about what inspires us to be financially fit and you’ve set some realistic goals. Now you’re ready to nail the basic moves and start building the foundations of your financial fitness. The first skill to master is saving – in this instalment of our ‘Fierce Females’ series, we show you how.

What does ‘financially fit’ mean?

When you’re financially fit, you have control over your money and your financial future — not the other way around. That means, you’re in a position to take opportunities and live out your goals as you’re free from financial restrictions. Becoming financially fit is a process that can look different for everyone. It might involve learning how to save and budget, especially if you have a specific goal in mind. As explained in our article Achieving financial independence, financial fitness is especially important for women, and the earlier you start, the better.

Start with a safety net

Before you start thinking long-term, your first goal should be to create a safety net, a financial buffer in case things go wrong.

NGS Financial Planner Deline Jacovides1 generally recommends that her clients keep around three months’ emergency expenses aside as a dedicated part of their savings.

“Illness, injury, a job loss or another unexpected event can happen to anyone at any time,” she explains. “If you never need the money, so much the better. But even with good insurance, expenses can mount up quickly.”

Savings you can stick to

Once you’ve built your buffer, it’s time to create a savings plan. Try to think of ways to rein in unnecessary spending, instead of starting with the mindset that you don’t have enough ‘spare’ cash to save.

  • Set up spending rules that suit you. Some simple tweaks could include limiting takeaway and eating out, or packing lunch a few days a week. Do you really need to buy two coffees a day? Could you cut back on Ubers?
  • If you’re partial to the odd splurge, don’t despair. Rather than setting yourself up for failure by pretending it won’t happen, make an account for this too.
  • Have separate accounts for day-to-day expenses, specific savings (say a holiday) and longer-term savings; then set your salary up to go into the correct accounts, in the correct amounts, automatically (‘out of sight, out of mind’ can be surprisingly effective).
  • Nickname your accounts, for example, ‘wedding goal’ or ‘house deposit’ so you’re constantly reminded of your goal and stay motivated.
  • If you already have a mortgage, consider a mortgage offset account to lower your interest payments.
  • Review your plan regularly to make sure you’re on track. If not, try to see what’s going wrong. Your plan may be unrealistic, you may have had an unexpected expense, or your goals may have changed. The important thing is that you’re adjusting it to give yourself the best chance of success.
  • For longer term savings goals, consider talking to an expert about how to achieve higher returns than cash in the bank. We’ll talk more about this in future articles.

The magic of compounding

If there’s anything that’s likely to get you keen to start saving, it’s the magic of compounding. Of course, it’s not really magic, it’s just maths, but if you leverage it as part of your financial fitness program, you’ll never look back.

Let’s look at an example. Say you save $200 per week for 10 years, that’s a total of $104,000 you’ve put aside. But if you were able to access an investment that delivered a high rate of return – let’s say an average of 5% p.a. after tax over 10 years – and you reinvested the earnings, then that $200 per week would grow to over $134,000 in 10 years. That would be an extra $27,000 for putting exactly the same amount aside every week.

You take advantage of the power of compounding when you put the interest or returns you get from an investment or bank account straight back in, rather than taking it out and spending it. When you do this, you increase your principal investment amount – and because interest is calculated on the principal, as it grows, so do your interest and returns, compounding over time to make a real difference to the size of your investment.

The best thing about compounding when you have time on your side and many more years of investing ahead, is that the sooner you start, the bigger your ultimate balance will be – for no extra effort or investment on your part.

This is especially significant when it comes to your super, which should be a key focus of your long-term financial fitness program.

“If you’re 30 and put an extra $50 per week after-tax voluntary contribution into your super account for 30 years, earning on average 7% p.a. after tax, then you’ll have around $264,500 extra by the time you’re 60. Of this, only $78,000 would be your ‘own money’ – all the rest is the returns from the super investment,” NGS Financial Planner Deline Jacovides explains.

“But, if you wait to start until you’re 40, you’d need to put aside $117 per week after tax to get the same extra balance at age 60. This would require over $121,000 of your ‘own money’.”

The message is clear. Start earlier, put in less and gain more. Start later, and you put in more and gain less. It’s that simple.

For financial advice, visit our advice page here.

1 Deline Jacovides is employed by NGS Super Pty Ltd and is also an Authorised Representative (1240373) of Guideway Financial Services Pty Ltd (“Guideway”) ABN 46 156 498 538, AFSL 420 367 and provides advice under the Guideway AFSL.

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