Saving milestones to hit before you're 40

Saving milestones to hit before you're 40

Whether you’re going to hit 40 soon or it’s a fair way down the road, looking ahead to shore up your financial security is a must.

Glenn Stevens, Reserve Bank of Australia (RBA) Governor recently commented that Australian savers are looking for high returns, which can set you in good stead for the future.

The RBA elected to maintain the official cash rate (OCR) at 2.5 percent, which is good news for those seeking home loans. Term deposits remain a good option for saving in terms of their risk profile, but the low OCR impact possible returns.

“On present indications, the most prudent course is likely to be a period of stability in interest rates,” Mr Stevens said.

Forty is seen as a milestone in itself, with many people holding a celebratory birthday bash. However, don’t leave yourself with a financial headache when you turn 40 — work towards these financial milestones, too.

Drive down the debt

Before you start saving up a storm, don’t forget to drive down any non-tax deductible debt you’ve accumulated.

At the end of 2013, total household debt was $1.84 trillion in Australia, according to the Australian Bureau of Statistics (ABS).

Some debt will take a while to knock off — for instance, if you’ve taken out a home loan. 

“At the end of 2013, three-quarters of all household debt was borrowing for housing”, the ABS said. However, paying off your credit cards, hire purchases and other debt can help you turn your attention to other financial milestones.

A tidy nest egg

You’ll become eligible for the Age Pension when you turn 65, although this age is set to rise in the decades ahead. 

Regardless, it’s important to start forming a tidy nest egg. When you hit 40, you’ll probably continue to work for another decade, if not two or even three. 

However, the earlier you start saving, the more interest you’ll be earning on your nest egg – don’t underestimate the power of compound interest! Set yourself a financial goal for 40, taking into account how much you’ll receive when you’re eligible for the pension and how much you actually want to live off. There may be a big difference between these two figures, so you’ll need to start saving accordingly!

A holiday fund

It’s important to pay off your debt and save up a tidy nest egg — but life’s about enjoyment, too. 

For many Australians, seeing other countries across the globe is important. Of course, when you add up the cost of flights, land travel, accommodation, sightseeing and food costs and other expenses, a dream holiday can quickly seem financially unattainable.

One option is to put off travelling for some time and focus on building your career or raising a family in your 20s and 30s. Meanwhile, top up a holiday fund on a regular basis — preferably with each pay cheque. Open a dedicated savings account for your overseas adventure and be sure to accrue plenty of holiday leave, too.

Once you’ve saved up enough money and annual leave, reward yourself with a trip to places you’ve never seen before. Whether it’s a trip to charming Spain and romantic Italy, a jaunt to the exotic beaches of Thailand or a soul-searching trip to South America, there are plenty of countries that will enrich your appreciation of the world.

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Learn more about 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

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 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.

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.

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 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.

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.

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.

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. 

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.

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 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.