Considerations affecting savings

There are a number of factors that contribute to your financial position. This chapter explains why you should consider saving and some of the influences that affect how much you can save.

Goals

If you earned $100 a week and spent everything that you earned, then you can never buy something that costs $200. If you saved part of your income over a few weeks, then it becomes possible to buy something at a price beyond your weekly income. Opportunity cost is the loss of choice you suffer when you cannot buy something because you have spent the money on something else.

Next you should ask yourself how soon you want to achieve your goal and, with regard to your income, if this time goal is possible. The considerations listed in this chapter will affect how soon you can achieve your goal.

Your income

The easiest way to save money is to earn more and spend less. The amount you earn is a major consideration in deciding how much you can save, but the other factor is whether your income is regular and reliable. If you work as a casual employee, you may not have fixed hours and therefore may not earn the same amount from week to week, which would affect your saving pattern. Part-time and full-time positions offer fixed hours and therefore a more regular and reliable income.

It is also possible to look for other sources of money, either another job or money that you can earn from a hobby, to supplement your income.

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Your expenditure

Your expenditure in relation to your income will determine the amount you can save. You already know that you will need to make some involuntary payments, such as tax or superannuation contributions, but you decide how to spend the rest of the money. The money you receive after tax and superannuation is your net income. (Gross income is your total earnings before compulsory deductions).

You must also consider any debts that you need to repay and factor that into your expenditure. If you have set repayments, then include them in your necessary expenditure.

Once you know your net income and take into account other necessary expenditure, such as rent or board and other living expenses, you can put the remaining money towards your savings. If you reduce your expenditure by cutting your voluntary spending, you can increase your savings.

Internal factors

On an individual level, your ability to save successfully will depend on the sacrifice or compromise that you are prepared to make with regard to your income and expenditure. You might decide that you will stop going to concerts for a few months in order to save the money you would have spent on tickets, or you might decide that if you take a second job, you can still go to the concerts.

An important part of reaching your savings goal is the determination to do so, which may relate to how much you want the item for which you are saving. Your discipline, that is, the ability to form a savings plan and maintain that plan, will also contribute to whether you can save successfully.

The plausibility of your plan will affect your willingness to maintain it. If you are too strict and have little discipline, then it will be easy to stray from your plan, but if you know yourself and allow a little flexibility, then you can develop a plan that suits your level of discipline and fits in with the compromises that you are willing to make.

External factors

Where you decide to deposit you money will also affect your savings in terms of the fees that you may need to pay or the interest you might earn from keeping your money with a financial institution.

You would deposit money with a financial institution for long term saving or for larger amounts, both of which could earn interest. Many employers pay their staff via direct deposit, so your money may already go into a bank account before you access it. Keeping your money in the bank may also help you control expenditure.

Most transaction accounts do not earn a lot of interest, so you might consider other options such as high interest accounts or investments that might yield more money during your saving period. If you do not have a specific goal in mind but want to get into the habit of saving, then investments such as term deposits or shares might be a good way to boost your savings with extra money.

There could also be external factors that affect your savings negatively, for example, an emergency that requires payment. In order to accommodate an unforseen incident, you would need to rely on the flexibility of your initial plan or make an exception for this case. This means that if the item you wish to buy is only available for a limited time, you should aim to reach your saving goal well before that time or look at another way to pay for the item.

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