Timeless money tips that could help you make up to $277K

Classics are classics for a reason whether that’s books, cars or even money rules. Effie Zahos reveals six money tips that stand the test of time.

1. Pay yourself first

Paying yourself first is one of the best things you can do with your money. Set your savings to autopilot. Work out how much you can save from each pay then set up regular automatic direct debits from your everyday account into your savings. This means the money is stashed away before you can get your hands on it. It’s a good idea to time the transfers to coincide with paydays to avoid overdrawing your transaction account.

Someone on the average full-time wage in Australia, which according to the Australian Bureau of Statistics is $1,838, would bring home $1,386 after tax. If they paid themselves 10% from each pay then by the end of the year they’d have saved about $7,200. If they just waited to see what was left over by the time the next payday rolled around there’s no telling how much lower that number would be.

2. Start investing early

The earlier you start investing, the better off you’ll be. That’s because compound interest has more time to work its magic and do the heavy lifting for you. Let’s look at a hypothetical example that demonstrates the benefits of starting early and the power of compounding.

Let’s say Lisa starts investing $200 a month when she is 25, keeps this going until she is 65 and earns 6.79% a year on her investment. Over 40 years she will have contributed $96,000 of her own money but her investment would be worth $463,413 – so $367,413 is from the returns on her investment.

Now let’s say Lisa didn’t start investing until she was 40. She still invests $200 a month, keeps this going until she is 65 and earns 6.79% a year on her investment. When she hits 65 she will have contributed $60,000 and earned $90,371 from her investment – roughly $277,000 less than if she had started 15 years earlier.

The benefits of starting early

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Source: www.canstar.com.au – 28/11/2023. Annual returns based on S&P Global ASX200 10 Year Net Total Return series. Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account. Past performance is not a reliable indicator of future performance. Brokerage of $3 per trade based on a sample of micro investing platforms.

3. It’s not what you earn that counts, it’s what you spend

I first heard this more than 25 years ago when Paul Clitheroe, one of Australia’s leading personal finance commentators, offered me a job on the Money TV show at half the salary I was being paid by a major bank. He pointed out that the lower pay shouldn’t be an issue as “it’s not what you earn that counts, it’s what you spend”. The key, of course, is to spend less than you earn and save or invest the rest. You could be on a $1 million salary but if you’re living beyond your means you’re not going to get very far.

4. Ride out volatility

If you invest in the sharemarket – whether directly or through managed funds and super – you need to be prepared for the ups and downs. There will be good months and years and bad months and years but over time markets tend to recover. That’s why it’s important not to panic when the sharemarket takes a dive. Tempting as it may be to sell when markets tumble that means you turn a paper loss into a real one.

Vanguard provided me with a great example that illustrates how riding out volatility can pay off. If you had invested $1,000 in the Vanguard Australian Shares Index Fund in 2000 and added in $100 each month, you would have had $66,000 just before the COVID crash in March 2020. By 31 March 2020 that $66,000 would have dropped to $49,000. If you panicked, took out your money and put it into cash you’d have around $53,000 three years later. If you had stuck it out though your investment would have grown to about $81,000 over that same period. That means riding out the volatility would have left you about $28,000 better off.

5. Pay attention to fees

When you are comparing home loans there’s no doubt that the first thing you will look at is the interest rate but it’s vital to also take a look at the fees. Two loans may have the same advertised rate but if one has higher fees than the other it will end up costing you more in the long run.

That’s why you should always also look at the comparison rate. A comparison rate takes into account the cost of interest as well as fees and charges and is calculated based on a $150,000 loan, over a 25-year loan term. This will give you a better indication of how different loans compare.

Paying attention to fees is also important when it comes to investing. Even a small difference can have a big impact on your balance over the long term. InvestSMART offers this example: “Over the 30 years to June 2023, the annual return from Australian shares was 9.24%. Had you invested $10,000 at the start of that period and paid a fee of 1.5% to achieve that return, you’d have $89,651 at the end of it. If you paid just 0.5% you’d have $120,781.” That one percentage point difference effectively ended up costing you about $31,000.

6. Always pay off as much of your credit card as possible.

Cost of living pressures have resulted in more Aussies relying on their credit card to get by. But, if you owe money on your credit card, it’s important to repay more than the minimum repayment amount listed on your credit card statement. Making just the minimum payment might help you avoid late fees but it can cost you thousands of dollars in interest and it will take you decades (yes decades) to pay off your debt.

Let’s look at the numbers. Canstar’s analysis of RBA credit card data shows that of those Aussies with credit card debt the average balance accruing interest is sitting at $3,604. Simply sticking to the minimum repayments at the average purchase rate of 17.13% means it could take more than 34 years to clear the debt and cost about $7,500 in interest.

If you can pay $250 a month, you could get the monkey off your back in one year and four months and your interest bill would be $396 – $7,187 less than if you stuck to the minimum repayments. Even repaying $150 a month has the potential to save you more than $6,800 in interest.

Savings from making extra repayments on $3,604 credit card debt

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Source: www.canstar.com.au – 28/11/2023. Interest rate 17.13%. Based on personal, unsecured credit cards on Canstar’s database, excluding 0% interest cards. Credit card balance based on average balance accruing interest based on RBA Credit and Charge Card Statistics, Sep-2023 – assuming 38% of personal credit card accounts are revolving a balance and therefore accruing interest, per the Canstar 2022 Customer Satisfaction Survey (n=4936). Calculations assume a minimum monthly repayment of 2% or $10 (whichever is greater), with annual fees not considered.

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