Financial fitness basics: start saving02 Feb 2023 4 min read
Once you know your motivation and you've set some realistic goals, you're ready to 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.
For example, you might like to keep around 3 months' emergency expenses aside as a dedicated part of your savings. These funds could come in handy if something unexpected were to happen, like an injury, illness or job loss. If you never need to use that money for an emergency, then it's a bonus.
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 2 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, ‘new car’ 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.
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. This effectively increases your principal investment amount. Interest is calculated on your principal amount, so as you increase that, you grow your interest earned in turn. Over time, compounding can make a real difference to the return on your investment.
The longer your interest compounds for, the higher potential return — so the earlier you start, the better. And this is all 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. Let’s look at a case study to see the difference starting 10 years earlier could make to your super investment.
|Starting at 30 years old
|Starting at 40 years old
|Regular contributions (after-tax)
|$50 per week
|$117 per week
|7% p.a. after tax
|7% p.a. after tax
|Accumulated amount at 60 years old
|Amount contributed with your 'own money' over investment period
|Benefit of compounding
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.