How you can make $1 million

How you can make $1 million

While many of us would have spent recent years in angst over money, research suggests that the number of Australians with more than $US1 million in investable assets, excluding the family home, has hit a high.

While a million isn’t what it used to be, it is still worth chasing whether you’re in your twenties or fifties. So how do you do it?

Financial planner Marisa Broome told Money magazine that the key to reaching a million bucks within 20 years, for people in their twenties, requires a lifelong saving discipline.

“There are four main strategies you will need to use,” she said.

“They are savings; superannuation – both the superannuation guarantee contribution from your employer and any discretionary top-up contributions you make yourself; gearing – that is, using debt to invest, typically in shares directly or through a managed fund or by buying an investment property; and buying your own home.”

She recommends opting for a high-growth option for superannuation (assuming you’re comfortable with the volatility that this entails), as well as adding 2 percent of your salary each year to super through salary sacrifice. On top of this, Broome suggests saving (in after-tax terms) an extra 4 percent of your salary and increasing this amount by 1 percent each year until you are saving 15 percent of your salary.

A savings calculator, such as the one at RateCity, may help you to realise your goal.

Finally, review the plan annually or as your circumstances change, she said.

That’s because the best strategy for someone in their twenties is not necessarily the best for future years as market conditions, personal circumstances and your income change.

For those in their thirties, for instance, there is a good chance that children and a mortgage are now a part of the equation.

Julie Berry, managing director of Berry Financial Services, said to take into consideration how much superannuation is being contributed by your employer each year.

“This is a long-term savings plan by itself,” she told Money.

For example, if you are earning $55,00 per annum and your employer is contributing 9 percent per annum superannuation, that is around $350 a month being saved on your behalf, according to Berry.

“If you’re married and both on this level of salary, that is [approximately] $700 a month being saved already. This means that you then only need to save an additional $1218 a month to meet your saving goal of $1 million in 20 years, based on a $0 start,” she said.

No matter your age, Berry insists that the key to financial success is budgeting.

“A budget determines what you can afford to pay on debts, whether you can meet normal living expense and what you can afford to save,” she said.

The government’s Money Smart website (moneysmart.gov.au) offers a comprehensive budgeting tool, which can help you to check where you money is going, if you’re spending more than you can afford and whether your money is going towards your priorities.

 

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Learn more about 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 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.

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 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.

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 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

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.

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.

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.

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

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 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.

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.