Cutting back on your spending needn’t suck the joy out of life. Here are some tips to small changes that can lead to a big life now, and later.
Standard budgeting advice often presents us with the rather grim solution to future wealth being dependent on our ability to trim all the fat from our spending now. The key, we’re told, is to give up some of our daily joys and embrace a life of frugality. To live in luxury later you just need to lead a life of less now. There goes dinner out and our daily coffee fix and here comes taking your lunch to work in a paper bag.
But surely the point of saving is to enable us to live the lives we want, not to sap our lives of everything we enjoy. To feast tomorrow, you shouldn’t have to fast today.
Here’s how to save money without making life miserable.
Go Big
Before you start scrimping on sandwiches and cutting back on coffees (and don’t worry, we will come to that), let’s tackle some of the bigger financial issues in your life.
Fear not – just because they are big issues, doesn’t mean they’re going to be a big headache to fix. You can save a fortune over the long term by taking some very straightforward steps today. When it comes to plugging money leaks, a phone call or two and pressing a few buttons on your keyboard can work wonders.
First off, let’s tackle your power bills. The rising cost of electricity in Australia is enough to make anyone’s hair stand on end, but you needn’t resort to eating cold baked beans by candlelight if you want to save money. There are lots of relatively painless ways of reducing your power usage, from switching off gaming consoles after use (potentially saving $193 a year) to getting rid of your second fridge (surely worth the minor inconvenience of not having three dozen beers always at the ready, when it could save you $172 a year). You should also make an effort to tackle the big energy hot spots of heating and cooling, and if you own your own home you might consider investing in solar panels for future financial (as well as environmental) gain. But for a quick (and very satisfying) energy fix, go to the federal government’s Energy Made Easy website and find out which energy retailer’s plan would be best for you. If switching to another retailer saves you $300 a year, add this to your gaming console and fridge savings above, and you’re $665 a year up already.
Had a good, hard look at your super fund lately? No? You’re not the only one. But it might be worth your while. You see, the fees that your super fund is quietly but persistently charging you could be making a gigantic hole in your retirement savings. The extent of this hole will no doubt be a source of some annoyance if you only discover it the day you retire, so dig out your annual statement now, and find out how much you’re paying before it’s too late to do anything about it. If you’re not in an Industry SuperFund, consider making the switch. Unlike retail funds, which are run to profit shareholders, Industry SuperFunds are run only to benefit members. On average, they charge lower fees, which can make a huge difference over time. You can compare funds here. Over the past 15 years, the average retail fund has delivered about $47,000 less to its members than the average Industry SuperFund. That could pay for a couple of round-the-world cruises to celebrate retirement, just for filling in a form today.
Next, let’s take on the bank. If you have a mortgage, you’re probably already aware that the interest that you’re going to pay over the next few decades is larger than the GDP of some small nations, so you should consider any opportunity to reduce your interest rate. Go to a comparison website such as Canstar to see what products are out there. If you see a better deal than the one you’ve got, call your lender and ask them to match it. If they won’t, don’t be afraid to jump ship (assuming the new loan meets your needs, of course, and taking into account fees, etc). Paying 4.1% on $400,000 loan for 25 years, versus paying 4.5%, could save you $90 a month in interest. Or $26,950 over the length of the loan: $240,049 versus $266,999 (you can do your own sums here). Plus imagine how much fun it will be to tell the bank you’re leaving them!
Go small
OK, we’ve made some big savings. Now we’re going to make some small ones too. Yes, we’re going to cut back on coffee. But are we going to deny ourselves entirely the life-affirming pleasure of the double-shot mochaccino with a twist? Of course not. We’re just going to have one takeaway a day instead of two, saving us $20 a week, or $1040 a year, or $20,800 over the next two decades, depending on how you want to look at it.
Similarly, having one pizza delivery a week instead of two, one night at the pub instead of two, or one trip to the movies instead of two, can boost your savings without having to feel like you live in a cave and only go out to harvest fish and berries.
Let your motto be “moderation in all things”, as the Greek poet Hesiod said. (“Including moderation,” as most modern-day poets like to add.)
Another barely noticeable, but hugely effective, sacrifice you can make is of the salary kind. Salary sacrificing into super – in other words, making extra super contributions automatically out of your wage each month, before the taxman gets to it – can be a very effective way of super-charging your retirement nest egg.
Because super contributions are likely to be taxed at a lower rate than your income (depending on your circumstances), for many people this is a tax-effective strategy as well as a forced saving. For example, a 30-year-old earning $80,000 a year who salary sacrifices a mere $20 extra a week into super, saves $203 a year in tax (try the calculator for yourself), as well as ending up with an extra $48,100 in their super fund (based on this calculator).
Spend smart, spend slow
Before you make an impulse purchase, take the time to work out what its real cost is going to be to you. In other words, how long will you have to work to pay for it?
You need to value your own time. To do this, divide your take-home pay by the hours worked to earn it. Note, we said take-home pay: the amount that actually goes into your bank account each week, after taxes and super contributions and so on.
If you take home $1200 a week, and work 60 hours a week, including travel time and all that unpaid overtime that everyone seems to do these days, you’re effectively earning $20 an hour.
So the next time you’re tempted by a little online shopping after a couple of glasses of wine, take a moment to ask yourself: how many hours will I have to work to pay for this?
Then take a couple of days to mull over your decision – effectively giving yourself a cooling-off period.
Maybe you’ll decide the watering can in the shape of a pink flamingo is worth it. And maybe you won’t. But at least you’ll be making an informed decision.
Chances are that if you decide not to go ahead with the purchase, life today will still be good. And your future you will probably thank you for it.
This content was created by Guardian Labs as part of a partnership with Industry Super Australia, and published on 6 February 2019. Past performance is not a reliable indicator of future performance. The information referred to may change from the date of publication and care should be taken when relying on such information.
The products or services being advertised are provided by third parties, not REI Super and therefore will not be the responsibility of REI Super. REI Super may invest in these third parties but does not receive any payments or commissions from these organisations as a result of members using the products and services. Members should make their own assessment and seek professional advice as to the suitability of such products or services for their individual needs.