Amy Bradney-George investigates how to reach your savings goals by effective prioritising and savings account management.
September 7, 2009
The way Australians prioritise their savings goals can speed up or slow down how soon you reach the finish line.
When people end up juggling more than one savings target, the easiest way out is to give one goal a higher priority.
A recent Sallie Mae and Gallup study in the US reported most people put saving for retirement over saving for their children's education. Both of these are long-term goals, but one has to come before the other for effective financial management.
Figuring out your savings priorities creates a blueprint for a realistic and achievable savings plan to help keep your goals achievable.
The long and the short of it
The first step is to consider what you are currently saving for, both in the immediate and distant future, and how much importance is placed on every goal.
In most cases there will be a combination of short-term and long-term targets and the two scenarios below show how to manage different savings timeframes effectively.
1. Saving for a second car and saving for a home
A couple living together want to buy a second car so that they can both get to work easily, but have just decided to save up for a home. Their combined annual income after tax is $80,000 and they save $1,333 per month towards a home loan deposit, which is about 20 percent of their income.
If they increased their monthly savings amount by $333, an extra $83.25 every week, they could split the monthly savings into $1,000 for a car, and $666 towards the home loan deposit.
In 10 months they would have enough to buy a decent second car, and could continue to save $1,666 per month towards their home.
By continuing to save $1,666 monthly it would take one year and eight months for them to get a 10 percent deposit for a $400,000 home, and about three years and eight months if they wanted to put a 20 percent deposit on the home loan.
If they had decided not to buy a second car and saved the initial $1,333 per month for a home loan it would have taken them about 2.5 years for a 10 percent deposit and five years to save 20 percent for their home loan.
In this case increasing the savings amount slightly, and splitting it up between short and long-term goals, ended up reducing the time it would take to save up for a home.
2. Saving for a holiday and saving for renovations
A hard-working investor has decided to renovate a property she owns, but is also planning to go on a two-week holiday for a family reunion in six months time.
In 2006 the Housing Industry of Australia calculated the average cost of major renovations to be $84,381, and from this she has estimated it will cost her around $60,000 to do the renovations needed for her house.
She would also like to have at least $8,000 for her holiday, and calculates that she can manage saving $450 every week. If she put $350 per week towards her holiday she would save $8,400, and also have $600 for her renovations.
With only a small percentage of the renovation amount saved, she continues saving at $400 per week and ends up with $10,200 at the end of a 12 month period. At this rate it takes her about two years and five months to save enough to complete the renovations, allowing her to refine her plan for the home and get more accurate quotes.
The means to an end
Whether the goal is a holiday, a car or retirement, prioritising your savings will help make your savings goals realistic and achievable. The amount of time needed for long-term goals can also be significantly reduced by finding a high interest savings account to suit your needs.
It's also worth thinking about what the best way to save will be, because while having one account for all your savings goals could well increase the amount of interest you get, having separate accounts will help keep your goals focused. Whatever the decision, you can get ahead much faster by thinking about how to prioritise your savings.