Why is Einstein here? Compounding savings of course!
Einstein himself said it, “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it”. What he in essence is saying is that it is an amazing fact of life that something innocuous and consistent that compounds over time can become very large. In short, compounding and saving are a critical component of getting things right on a personal finance front.
So for me there are two important parts of saving, savings rate and how you save. so lets dive into this.
So this one is important as it’ll scale the timelines of things you can do with money and I’ll touch on later. To begin with, you’ll need to be able to save something, anything. If you cannot save anything at this time unless you’re on the poverty line it’s time to re assess what is really important to you and what you need to cut from your life that isn’t necessary. A good place to start is the multitude of minimalist articles out there on the interwebs. You can do this, or look at what you need to do to generate more income. For the vast majority of people in Australia though it’s a matter of reducing costs. The goal here is ultimately to be spending less than what you make, however you do that either by raising income or cutting costs is up to you.
From here, how much you can save is going to determine how much you can put aside and then generate more income with eventually. 10% of income for instance might be relatively easy to do, but you’ll be doing this for quite awhile on an average Australian income. 40 – 50% of income or higher is extremely difficult when paying your own expenses but possible. You’ll find alot of people doing this are either on high incomes or live with mum and dad but there’s a few rare people who manage this themselves, that said it’s not easy. 20% of income or so is decent and will certainly get you to some interesting positions. Keep in mind when working out savings rates in Australia, most comparable rates from overseas do not take into account our superannuation system, so 10% of net income (after tax) with 9.5% superannuation in Australia is a savings rate more like 19.5% for an American. Just obviously, with superannuation you’re not accessing this until retirement.
Lets use ASIC’s calculator as an example for after tax and superannuation situations. Below are three examples, Lets work this around an income of about $70,000 per annum which works out to be about $2086.00 a fortnight after tax.
This first example is over a 10 year time line, saving at 10% of net income. If you round this, you’re looking at about $200 a fortnight saved. Let’s assume a 3% interest rate which is about as good as you’ll get right now in a bank, your mileage may vary with other investments, interest rate changes and inflation effects;
In this instance, this has returned $60,555. Not too shabby for basically something most people could do half asleep, but not huge either.
So let’s kick this up a few notches to 20%..
This equates to $121,109, getting a bit better no?
Alright, let’s try 40% to see what’d happen if you really turned this up a few notches;
This gives you $242,218, much better huh? This in many places in Australia is almost the cost of a house or more than enough to do some serious investing for better returns.
In any case, however you do this, what you probably noticed from the graphs was as you go along, the money that you put in ends up becoming smaller and smaller in comparison to to money that is returned on your investment. In short, this is the power of compounding at work.
How you save:
So after reading the above, you might be thinking, ok this is great, I’m going to try to build a surplus of income and start saving now. Great! However, how you do this and the consistent discipline are just as important to success as the actual ability to start saving itself.
What I recommend in regards to this is;
1 – Setup your savings isolated from your bank accounts you use for transactions, see my post here. This reduces the risks of impulse spending chipping into your savings.
2 – Setup a regular debit from your pay or immediately after you pay goes to your bank account to immediately go to your new savings bank account. This will ensure consistent savings and ensure there are always funds available to transfer.
3 – As you begin to adjust to life with a certain amount of income being cut off the top into your savings, up your savings rate slightly say from 20% to 25%. Eventually you’ll reach a point where it’s impossible to do more, however, this works like boiling a frog where if you do it slowly and consistently you’ll barely notice until you’ve reached the limit of your capacity to save.
It’s not much more complex than that really, there’s no secret formula the Illuminati have been hiding from you. Consistency, discipline and time are what’s most crucial here.
That’s almost all I can think about on this one, but, if there’s questions or suggestions list them below or contact me.
It’d be a whole lot more fun if bank accounts worked like this
So this is the first step and easiest to implement, the bank account structure. By it’s nature too this step also helps with budgeting and ensuring your rate of saving which I will cover in the next article is at an appropriate level to meet future goals. Alot of this is similar to advice many commentators in this area give and that’s because it’s good advice in general. This will be Australian centric and that is the point, but the core of it could be applied anywhere in the world.
I structure this up so that I have two or if needed when we discuss debt three banks involved. I set these up in a transaction set, savings set and if needed debt set. essentially what you want to do is the following;
For this I’ll have one savings account and a credit card on a low rate, low limit and with no rewards, rewards add expenses and alot of people will never get back what they pay in interest and fees in rewards over a low rate card. Controversial I know huh? Now most articles like this will steer towards either that debt is the devil or load you up on more debt that Trump owes Russian oligarchs, I prefer a middle ground. Both sides have good arguments but cash flow is crippling if the cash dries up as is debt managed poorly, especially consumer debt.
You want the savings account to handle incoming cash and to distribute it and the credit card to have ease of cash flow and to insulate against fraud ect as most cards will offer fraud protection and best of luck managing that kind of issue if it’s straight cash coming from a debit card. The trick here is to have an auto payment of the full balance on the due date, in doing so you should pay no or little fees.
Now in Australia I’d totally agree with most of the recommendations out there and that is to set this up with ING. ING gets recommended by many as there are no fees and as long as you meet their minimum deposit and transaction amount per month. Fees from ATM’s or foreign fees are also refunded. I also recommend their Orange One card as well as it offers low interest, no annual fees and if linked to the savings account you can fully automate paying the balance each month so no interest payments. If you want a bit of a deal click here and enter the code FTU813.
From the savings account you’d also divide up your cash elsewhere automatically on payday so it’s sorted before it can be touched.
Savings accounts should be fairly simple in nature and they are. What you want for savings is a HISA or high interest savings account, while not nearly as useful as they once were they do offer some small return with maximum liquidity which is just as important a consideration.
Now I really only have two recommendations outside ING and you definitely want to do this outside your transaction accounts if possible. Ideally, you’ll automate a transfer to one of these options on pay day to make this as simple as possible. Once done, you shouldn’t need to look at this.
If you need flexibility setup with Ubank and setup a combination of a Usaver Ultra (and burn the card if you need to) and a USaver account. Using these in combination and as long as you meet minimum deposit amounts per month you can get a 2.87% rate at this time with no penalties for withdrawing cash which can be important if you’re using this as an emergency account or as a holding facility for investment funds or as a fund for other purposes. I keep a dollar in my Usaver Ultra and then have an auto transfer into the Usaver from the Usaver Ultra the day after I know the money should be in my account which came from the transaction accounts to keep the maximum rate ticking over.
If you don’t need the cash immediately then look at the RAMS Saver it offers a 3% rate, slightly better than Ubank, however, to get that bonus rate you cannot withdraw funds. If you do, the rate drops to 1.35%. For that reason I recommend Ubank most of the time as 0.13% interest isn’t as valuable as liquidity to me for the purposes of this account.
The nasty part of this discussion, debt. Ideally, you don’t need to have this setup but alot of people do to get out of bad situations in the past. That’s ok, everyone must start from somewhere. Ideally, what you want to do is to consolidate your debt into one credit card on a no interest balance transfer. Do be careful of percentage fees first but as some of these can be as large as several months interest in one go. This, as long as you destroy the card once you get it so you can’t just rollover and continue bad habits is the only genuine way of getting one up on the banks with consumer debt issues and extortionate interest payments.
The advice here is short and sweet, shop around as deals constantly change here, setup an auto payment from your transaction account and do it with another bank separate to the others you’re using.
That’s almost all I can think about on this one, but, if there’s questions or suggestions list them below or contact me.
Something along this line…
What’s this about?
So, as the title says, why? Simply, this is an effort to chronicle some of my knowledge for my friends and family in the hope that it provides them with some value and they can take my knowledge and apply it in their lives. This series of about 20 posts will be focused around money management and how ultimately this factors into my wider view points on life. For the very advanced this will be remedial in nature and maybe quite boring, this isn’t meant for you, go back to /r/WSB and keep losing money on Micron. This will not be one size fits all “safe” personal finance advice either, I have just a little more faith in peoples cognitive abilities when presented with facts and options than some literature on these issues.
What about me?
Why am I here though, that is the cumulative effect of years of experience on how things can go very wrong. I am a early 30’s guy in Western Australia working in IT for a SaaS company. My 20’s were lost in a series of bad decisions, depression and self depreciation culminating in a series of difficult years. In these I ended up relying on freelance or contract work, applying for 780 jobs and racking up some serious debt because of that. One thing I was absolutely certain about regardless of anything else was after I got out of that I was never going back. To that end, I spent endless hours educating myself about how to not go back there, this will distill that into a few hours of reading at most.
Where this is going?
It could be that no one will actually read this, not even the people this is intended for though I hope that they do but if one person can get some value out of what I have to say then it’ll make life easier for another person and they can experience what it’s like to break some financial shackles and get their personal finances under control. Money isn’t everything, even when your decision is eating or bills, but, it sure does help make things go alot smoother in life.
I have a good idea about what’s next to write, but, if there’s suggestions list them below or contact me.
Juicing time – February 2018
So one of the things I do from time to time is a bit of brewing, my philosophy behind this however is as simple as it can get, accessible and as natural ingredients as possible. Sure, I could dive into some sweet fermenters or temperature controlled environments but that doesn’t exactly make what I’m doing accessible and doable by anyone on a budget. Basically my entire kit consists of;
2 x 5L Demijohns
2 x Airlocks and Bungs
1 x Hand pump with filter
1 x PVC hose
1 x Set of jugs
1 x Hydrometer
Filtered Juice – February 2018
UnFiltered Juice – February 2018
So for this cider brewing I needed;
9KG Apples (making about 4.5L Apple Juice)
Something to sterilise your equipment and fruit
Yeast (I needed to select one suitable for room temperature brewing, be careful what you choose)
Nutrient (Yeast cannot live on apple juice alone)
Some kind of sugary addition you can add to pitch the yeast (brewers sugar works well)
Pressure rated bottles, regular bottles won’t cut it here
The first step before I got started was to pitch my yeast, adding some nutrient, some sugar and water together before I got started helped here. Then cleaning my equipment, making sure you’ve cleaned everything is super important here to prevent the wrong things infesting your juice.
Once done I got to juicing my apples, then filtering the juice to get rid of scum on top It’s also important to clean up your fruit prior to avoid natural yeasts infesting your juice. Quite a few people will use a sterilisation tablet either to wash the fruit or in the juice its self and wait 24 hours before pitching their yeast and add it then.
Once the juice was prepped, I added my yeast to the demijohn then poured the apple juice in and sealed with the airlock. I was fortunate at the time my ambient temperatures were in the perfect range but this is something to watch too and can ruin a good brew, read your yeast instructions.
After brewing for about a week, It was time to bottle, about 2 priming tablets in a 750ml bottle was enough to ensure carbonation, Much like prepping the equipment earlier, clean and sterilise everything.
The original with just juice – February 2018
The Mint flavoured variant – February 2018
Oh and before anyone asks, the apple pulp? It’s being fermented too as an addition to the verge garden. Using bokashi allows me my quickly break down organic matter while also not having the space for a proper compost pit.
The bokashi fermenter ready to roll.
As always if you have questions comment below or contact me.
The Verge – January 2018 South facing showing car tracks
The Verge – January 2018
So it’s early days on the verge garden and I’m still working on fixing up the terrible soil here. The above picture is what the verge area I’m taking on looked like in January 2018 just after I moved here, even watering this I noticed it’s water repellent and that soil you see on the path extends half way down the street having being blown away over time. One of the neighbours advised me that there had once been a tree here but it was an unfortunate victim of the development of a unit complex nearby, regardless alot of remedial work will be require before I can do a thing here. The soil as mentioned is water repellent, compacted and otherwise devoid of any organic matter. Getting an OK to proceed from the council was needed despite some of the most progressive policies on this front in Australia due to that chicane, in short, I need to keep anything from the line of the sign furthest from the road forward to it below a certain height to retain road visibility.
Mulch pile – February 2018
After doing some things including layering down some cow manure, clay and some wetting agent along came the mulch. This was a huge load as pictured and was a freebie from a local tree pruning company via Mulchnet , while using eucalyptus mulch wasn’t a first preference it’s certainly more sustainable, it’ll just require more work.
Mulch raked – February 2018
After spending a good afternoon raking it out and watering it in, it’s been mostly a case of keeping it moist to try to pull off some kind of hot(ish) composting with the large amount of leaf matter amongst the wood chips. This has involved watering and forking it about once a week to start with to keep air moving to the lower layers.
Mulch – 3 weeks in February 2018
Finally that gets me to where we are now, about three weeks post mulch going down. It’s holding a nice temperature inside and you can see alot of the leaf matter is breaking down quite quickly (those dark brown and black patches) and is slowly reducing in size. I may need to take some off before planting as there’s still alot of bulk there but I’m satisfied so far with progress.
Aside from one or two fruit loops nearby who have grumbled most of the reception has been fairly positive so far to what I’m up to here. As for the what I’m up to part, I’m planning to implement a full herb garden, full of hardy varieties people can still use to cook with around here. As is visible from my photos there are alot of unit blocks near by to me and a large number of those are in lower socio-economic groups, basically people without the means to either grow these or buy them without hurting the limited funds available. I’m avoiding vegetables as there are many problems that I can forsee (pests especially) here and as I am renting this house, I may not be here in a few years to keep this going which would likely be needed for a vegetable garden. Herbs at least will still be useful and make a good use of this space.
If you have comments leave them below or contact me.