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Five barriers to savings and how to beat them
Andrea Sophocleous reports on how to avoid the five most common speed humps when racing to your savings goals.
October 21, 2009
Opening a savings account can be a good discipline for putting a stop to your spending habits. However, the biggest hurdle most people face in trying to cultivate regular savings is the daily pressures of bills and general life expenses. Recognising the most common barriers to saving can help you takes steps to overcome them.
1. Housing costs
Whether you rent or are paying off a mortgage, conventional wisdom dictates that your housing costs should not exceed one third of your income. Spending more than one third, in fact, qualifies as mortgage stress.
The most effective way to reduce your housing costs is to move. Consider moving to a more affordable area or downsizing to a smaller house or apartment.
2. Education costs
While you can never under-estimate the importance of education, the cost can sometimes be more than you bargained for. If you are a student, Austudy or a student loan can help keep a lid on costs – your student centre can help you sort through your options.
As the parent of a student, you should also consider setting up an “education fund” – a high interest savings account with regular deposits to cover the ongoing costs of education.
3. Debt
For most of us, our mortgage is the biggest debt we'll carry through much of our adult life. But debt comes in all shapes and sizes – furniture or appliances bought on interest-free loans, mounting credit card debt and car loans are all symptoms of our buy now-pay later consumer mentality.
Consolidation is one way to tackle debt, by taking out a personal loan used to pay off other debts. The benefit is that the interest you pay on a personal loan is often a lot lower than the interest charged on credit cards.
If you find it difficult to take charge of your debt and make regular repayments to avoid massive interest charges, seek advice from a professional such as a financial adviser (who will charge you a fee for their services) or a financial counsellor (whose services are free).
4. Unexpected events
Unexpected unemployment or sudden expenses – such as a car breaking down, a roof beginning to leak or costly medical bills – can play havoc with budgets and saving plans. While you cannot predict when disaster will strike, you should always be prepared.
A savings buffer of $3,000 in a high interest savings account is recommended by Paul Cooke, a financial adviser with Centric Wealth, “...so you always have that ability to access the money if something unexpected happens.”
If you are concerned about meeting your mortgage repayments in the event of job loss or other financial strains, talk to your lender straight away. Banks offer a number of hardship provisions to help you through hard times.
5. Shopping addiction
Not all barriers to saving are day-to-day fundamental expenses. Like addiction of any kind, obsession for shopping can be a serious problem requiring the help of a counsellor. But there are also steps you can take to help yourself out of a spending rut.
“It's best to start by seeing where you spend your money and you might be horrified to see that shoes take up 25 percent of your income – that may act a catalyst to change your behaviour,” Cooke says.
On a bigger scale, keeping a diary of your daily expenses can help you identify your weaker areas and motivate you to curtail unnecessary expenses. Spending is easy when you don't keep track of your purchases and focus on each new buy. When you stop to analyse your behaviour, however, it becomes easier to change it.
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