First home or holiday: Money management with savings priorities

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.

 

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Learn more about savings accounts

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details