Almost counter intuitively to wider cultural belief the key to building your wealth is not achieving above average growth but simply saving instead. Saving simply put is your income less expenses. There are two ways to grow your savings, increase your income and decrease your expenses.

Many years ago there was a study completed showing that it is your savings capacity more than any other factor, that contributes to your ability to financially retire and some of the rules of thumb that arise from this study are:

If you can save 90% of your income you can with no other expenses retire in 5 years.

If you can save 66% of your income then you can retire in 10 years.

If you can save 50% of your income you can retire in 17 years.

In Australia we are told to save roughly 10% of our income and on this basis you will need 51 years to adequately save for retirement, assuming your savings rate is after tax, this unfortunately means that most people who intended to work and retire at 65 unfortunately do not have enough money built up to retire which is also what is commonly experienced in Australia fueling the dependence on the aged pension system.

The above comes with a few assumptions, such as your core goal being to reach the capacity to retire and that you invest and achieve reasonable long term rates of return

How it works

In the short term increasing your income can be difficult, so we will set that aside for the moment, where as much like the relationship between Diet and Exercise improving your diet (in this case reducing your expenses) often has the biggest impact.

Reducing your expenses is also tax free while increasing your income can be weighed down by increased taxes.

Your first Step, create a budget, list out all of your expenses and identify for your benefit what you spend.

Your second step, understand what your existing savings capacity is, your income less these expenses, if it is above zero than check are you saving the amount that you should be saving according to this budget. Keep adjusting the budget until it realistically reflect your spending behavior.

Your third Step, identify your goal and time frame, and what savings capacity is required to achieve that target.

Your last step, adjust your expenses until your goals are achievable. Then for every goal rinse and repeat the above steps.

Did you know that many expenses that feel mandatory can be reduced without a sacrifice of quality, household bills can be negotiated, shopping around can yield the same outcome at lower costs, product substitution can lower your costs and sometimes it can be valuable to rethink if you actually need something.

When approaching your budget with your goal in mind things are simplified, but sometimes we just need a prod and support to start our savings journey, if you have any questions or need assistance we welcome your call.