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Are you a spender or saver?
Season 1
Episode 31
Published 7 years, 11 months ago
Description
Are you a spender or saver? Do you find it hard to stick to a budget? Do you find it difficult to save towards a goal? For some people, saving money comes easy to them. For others, it’s like pulling teeth.
You might need to adopt a different investment strategy depending on your answers to the above questions.
Success requires some income
Surplus cash flow is oxygen for any financial strategy. Without it, no financial strategy can survive. As I have said in the past, it is critical that you contribute a certain amount of your income towards building your financial future every fortnight, month and year. It is virtually impossible to build wealth without surplus cash flow. Therefore, if you are spending as much as you earn, you cannot expect to get ahead financially.
Basic steps
Most people are smart enough to realise that wasting money is stupid. The problem however, is that if you don’t know where your money is going how do you know if you’re wasting it or not? And that is the most common mistake that people make – not knowing where their money is going. Worse still, I find that most people consistently underestimate how much they spend. If you’re underestimating how much you spend, then possibly you’re also underestimating how much money you’re wasting. You cannot manage what you do not measure. Therefore, at an absolute minimum you must sit down every six months to understand exactly where your money is going – even if it’s at a high level. In my new book Investopoly, I have dedicated a full chapter to helping people improve their cash flow management. I provide a screenshot (click to enlarge) of page 34 below which sets out how to review your last three months of expenditure.
If you’re a spender
There are a couple of investment strategies that spenders will find it easier to stick to. The key theme in all of them is to do what Warren Buffett tells us to do which is to “invest first and then spend what’s left over”.
Idea 1: Make additional super contributions
One thing you can do is contact your payroll department and ask them to deduct a certain amount of money from each pay and contribute that into super (as a concessional contribution). This is also a tax effective strategy as any contributions are taxed at 15% instead of your marginal tax rate (for people earning less than $200,000 per annum).
Technically, depending on your age and financial position, it may not be a high priority for you to make additional super contributions. For example, maybe it’s more important for you to repay your home loan. However, if the reality is that you would just spend the money that you could have otherwise contributed into super (and not make extra home loan repayments) then perhaps making additional super contributions is a good thing for you to do i.e. forced savings mechanism.
Consider this case study to demonstrate how effective it can be:
Susie is a 30-year-old earning a salary of $100,000 a year. Therefore, she is already contributing $9,500 per annum into super (i.e. her employer’s contributions). If Susie contributed an extra 3.5% p.a. of her gross salary (i.e. $3,500 p.a. or $67 per week), by age 60, her super balance would be 32% higher ($965,000 versus $1.27 million). That is a big reward for a relatively small sacrifice that will probably go unnoticed i.e. no adverse impact on your standard of living.
Idea 2: Borrow to invest in property
Borrowing to invest is a good forced savings mechanism. I’m not suggesting
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