Saving gives us a sense of achievement, more personal freedom, access to cash in emergencies, may allow us ease our workload, and maybe we can retire sooner.
As we get older life & medical insurance become very expensive, so we can drop off those costs and if needed use our savings instead.
Your savings pool is "money at work" – the interest, dividends, and capital gains.
Things savers need to know
- no gain, no pain
- don't let your money be lazy
- how to put money out to work
- learn about the magic of the magic of compound interest
- learn about the magic of compounded dividends & capital gains
- how averaging works for you
- why diversification is very important
- why rebalancing is very important
Most of us probably need to 3 to 5 different pools, each earmarked for a purpose and used only for that – a key saving discipline.
- emergency money – essential
- short term such as holidays and car upgrades
- mothers might want their own little pool
- medium term for a house deposit, and then diverted to mortgage payments
- may be a pool for children's higher education
- long-term for retirement (Kiwisaver won't be enough)
Winston Churchill said he "never worried about action, but he always worried about inaction." Any saving is good saving, and any amount is better than none. For the best chance of success, make sure it is set up to be automatic.
Access to cash (liquidity) so important
You need some money in a hurry but you cannot lay a finger on $1,000 in cash.
Your good old savings pool saves the day.
No bank will lend you cash if your income stops for any reason e.g. redundancy, illness, accident.
Your savings might save you, but they must not be in the bank where you have your mortgage, because the bank can help itself to all your accounts if you are in arrears.
Keep control, put it elsewhere.
Never put your emergency money in the same bank where you have your mortgage
Build up your emergency pool before paying off your mortgage.
Don't base too much reliance on the value of your business to fund your retirement
A business broker tells me that the gap between sellers and buyers can be very wide.
Beware of having rose coloured glasses as to the value of your business.
Most business owners would be best to save into a fund outside of their business to be sure, which will also add diversification and cash if an emergency occurs.
Waiting v costs
Save $500 per month for 25 years at 6% net return and it will grow to $349,000
Procrastinate for five years and then start;
– $500 per month 20 years at 6% net return you will get $234,000
A big difference and a big cost
In our next article we will cover where to put your savings, diversification, lazy money, the magic of compound interest, averaging, rebalancing and where to get advice.
This article was supplied by Alan Clarke who is the author of a book entitled "Retire Richer" which is a practical guide for everyone age 25 to 85.
Alan also writes regular articles on www.acfs.co.nz
Alan is an authorised financial adviser (AFA) and his disclosure statement is available on request and free of charge.