RSM Australia

Save for your property and have your avo' too..

Wealth Management Insights

Millennials want it all but aren’t willing to give up some indulgences in life, or so social media tells us.

It took one viral post about smashed avocado on toast for it to become the symbol of the younger generations’ inability to go without.

It would seem thatproperty the trendy Sunday brunch is dashing the dreams of first home buyers, and saving a deposit has become an impossibility.

Yes, saving for a property does take sacrifice, but our millennials can be excused for feeling disheartened. In Melbourne and Sydney housing affordability is at an all-time low.

The price of property in these cities is now worth more than six times the average person’s wage.

Home prices, June 2017

With this in mind, the mantra being instilled in first home buyers, and certainly the message of the viral avocado article has become ‘lifestyle sacrifice’.

It’s being conveyed that the only way to reach your savings goal is to deprive yourself of all the ‘fun things in life’.

The reality is cutting a few avocados off your weekly shopping list will barely scratch the surface. But if you take the penny-pinching too far, your prime years of life could become rather miserable.

So while there’s no doubt that cutting expenses is a crucial part of any savings plan, there are better ways to boost your savings without being controlled by the fun police.

Some key areas to look at include: 

  • Be realistic with your cash

    Set a budget and set your expenses to a level that won’t cause you to hibernate from society for years on end. Find something you can stick to over the long term. Work out your income after taxes and subtract your fixed expenses. This should leave you some surplus cash for variable lifestyle expenses and the occasional ‘Avo’. By laying out these figures you’ll instantly have a good idea of what you can regularly save.

  • Pay yourself first

    Save at the start of your pay period. As soon as you get paid, deposit your planned savings straight into a separate account. This will keep the funds available for expenses at a set limit, reducing your ability to make impulse purchases. Remember in step one above, you’ve already made room for some lifestyle expenses, so this just ensures you don’t go over the top. Caution, you may be tempted to go to the trusty credit card when cash is low. To avoid this ensure that you pay your credit card off each month.

  • Estimate time taken to build your savings

    When setting your budget, it’s important to identify how long it will take to meet your savings goal. A few quick Excel sums can forecast how much you could have in three, four and five-plus years, giving you a realistic idea of when you’ll hit your deposit target. Tracking your actual progress against these forecasts can be really useful and can encourage you to find new ways to save. It’s very rewarding to achieve your goal earlier than expected.

  • Pay off credit cards

    Interest on credit cards is high, up to 22%, and can prevent the most careful savers from achieving their house deposit. For example, a $10,000 credit card debt, with annual interest of 22% and minimum monthly repayments of 3% over a 5 year period will cost you $10,359 in interest over a 5 year period. Get rid of these high-interest debts as fast as you can to boost your ability to save.

  • Shop around, where it mattersproperty

    Your budget will tell you where you are regularly spending your hard earned cash each month. Things like car and contents insurance, health insurance, gas and power suppliers, mobile phone and even internet. It’s worth reviewing these regularly, or at least every couple of years, to ensure that you are getting the best value for each dollar spent. Across the seven suppliers listed if you could save $10 per month, that is $70 a month or $840 a year. The potential saving could be even greater, which is more savings towards your new home. You may even find banks are prepared to do some deals on interest rates and fees on things like credit cards, bank accounts and the like.

  • Get the highest cash rate

    When saving in cash it’s important to get the best rates for your money. Recently the Reserve Bank of Australia’s cash rate has only been around 1.5%, with most banks paying less than that on cash deposits. You don’t have to accept that. You can shop around or look for different cash vehicles to grow your money. Savings Accounts, Internet Savings Accounts and Term Deposits can offer a higher rate on the deposit, with some difference in your ability to access the cash. As you are saving for the long term anyway, instant access will be detrimental to your goals so potentially using one, or a combination of these can help you pick up an extra quarter to half a percent on your money. Plus it is still considered a low-risk investment.

  • Consider other investment options

     If you’re a more aggressive investor and are prepared to take on more investment risk in order to improve your returns, then you might consider some other investment vehicles. Investments such as shares, corporate and government bonds and listed property trusts can help you earn a higher rate of return and accelerate your savings. There are various ways to gain access to these types of investments relatively easily and often when a portfolio is appropriately created for your risk tolerance, the returns from these vehicles will in the long term exceed the prevailing cash rates paid by banks. 

For example:

If you had $20,000 earning an additional net return of 2% p.a. over a 7 year period, that would be about $400 in the first year and potentially increasing each year assuming the earnings are reinvested. The reinvested investment returns can benefit from compounding returns which, without any additional investment, could help grow total returns to over $2,900 (14.8%) over the 7 years.

One of the most important habits of saving for a house deposit is to get started early and stay committed to your budget so that you can let the power of regular investing and compounding returns do its work.

Take the time next Saturday to grab some ‘avo’ on toast, add a bit of feta, and then make a plan for what you can be doing to help achieve that deposit for the new home you’ve been dreaming of.

If you think you may need some help to get your cash flow and budget in order, then you may benefit from a Free Financial Health Check with an RSM Financial Adviser.

An RSM adviser will walk you through all of the options available, review your cash flow and personal finances to see that they are appropriately structured and help you determine where some changes can be made to help you achieve your savings goals. click here and leave your details and a RSM adviser will contact you.

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This article has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.
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