When your savings aren’t actually savings

I regularly talk to people who feel like they are getting nowhere. They know that in order to get ahead, they should be saving a portion of their income to get ahead.

But despite diligently putting away hundreds of dollars each week, they seem to end up with no savings.

How is this possible?

When it comes to expenses, they don’t happen evenly across the year.

Whilst some things like your mortgage payment, food shop and petrol costs are consistent from week to week, there are a lot of expenses that are inconsistent.

Holidays, Christmas gifts, car services, registration, all of these are examples of costs which arise inconsistently throughout the year.

If you don’t plan for these ahead of time, you quickly find your savings disappearing as these expenses pop up.

Let’s give an example

Let’s take a family of four who likes to spend $15k on a holiday each year.

Let’s put aside the other inconsistent costs like Christmas, rego etc and just use the example above.

Each week, this family is putting aside $300 as savings. They can see their account increasing and they feel like they are getting ahead.

Then suddenly the holiday rolls around and all of the savings are gone ($300 x 52 weeks is $15,600).

Another great example is cars. Let’s say they like to replace a car every 5 years at a cost of $30k.

If they were saving $115 per week, after 5 years they would feel like they had heaps of money until they needed to buy the car (taking them back to zero).

So how do you ensure you have enough money for all your expenses plus savings

When it comes to identifying your costs of living, I like to work to an entire year and then work backwards as to what this means you need to save each week.

If you’re looking to take this to a whole new level, I would also then factor in the car replacement (since if you don’t you’ll just have a car payment plus interest).

Once those are addressed, THEN I look to add in a rate for savings.

You can manage this by bucketing your money into different accounts. A holiday account for the holidays, a car account for the car, and perhaps onto the home loan or an investment account for the long-term savings.

So if you find yourself saving each week but somehow not getting ahead, this may apply to you. If so, please reach out, we are always looking to factor this into a good financial plan.