Expert Advice with Sam Saggers 16/10/2016
Saving for your first deposit can seem to take forever, but there are things you can do to make the process easier and perhaps even faster.
Reduce your debt
One of the best ways to put more money back into your pocket is to eliminate your bad debt.
There are no “wrong” or “right” ways to reduce your debt. What’s more important than choosing any particular method of debt reduction is following through with it. Choose the method that appeals the most to you and then follow through with the plan.
Following are two of the more popular methods of debt reduction:
Debt snowball method
• Car loan: $25,000 at 6%, minimum monthly payment of $400
• Personal loan 1: $15,000 at 8%, minimum monthly payment of $120.
• Personal loan 2: $5,000 at 7%, minimum monthly payment of $150.
Total debt payment = $670.00
As the months go by, the second personal loan will be paid off first because it is the smallest.
With the debt snowball method, instead of paying only $520 ($670 - $150) the $150 (loan #2) is applied to the next smallest debt, so in this case loan number 1).
• Car - $400
• Loan #1 - $120 + $150 = $270 towards this loan
As you can see the total debt repayment amount remains the same. ($670.00)
Debt avalanche method
The debt avalanche method is similar to the debt snowball method, however instead of paying off the next smallest debt, you’ll pay off the debt with the highest interest rate.
• Car - $400
• Loan #1 (highest interest rate) - $120 + $150 = $270 towards this loan
Like the debt snowball method you’ll pay your loans off faster, however you won’t get the psychological boost that can come from paying smaller debts off first.
If your loan is large it may take longer to pay off your loan, however this method can help you save thousands of dollars in interest so it’s a good option to consider.
Rework your budget
Don’t have a budget? Well, there’s your problem...get one! No serious savings plan is complete without a strategy to reduce spending. Go through your bills and outgoing expenses to see where you can make some changes.
There are two basic ideas surrounding bill reduction; make a lot of little changes or make several large ones.
For example, you could sell your extra car and get rid of the insurance, maintenance and finance costs (if any) surrounding it, or you could back off the lattes, daily take-aways, pay tv, etc.
Or, if you’re really feeling ambitious, do both!
Of course you can simply choose to keep the same bills you have and work on reducing the “miscellaneous” category that can seem to take up a large share of the average person’s monthly income. Bottom line, keep track of your spending and plan your budget BEFORE you spend, not after.
Sell your stuff
Saving for a deposit can be stressful enough without adding the stress that comes from owning too many possessions. Weed through your stuff lighten your load both physically and mentally. Sell what you don’t love and put that money towards your deposit (instead of absorbing it into the household as so often happens).
Make more money
Take on a second job or freelance your skills to boost the money coming into your household.
Pay yourself first
Before you pay anything or anyone else, pay yourself first. This is non-negotiable
Calculate the amount you can save without going into more debt or not paying your bills and then put that amount away first. If you can do it, 10% is a great place to start. If you can’t, then it’s a good goal to strive for. To avoid any cash flow problems throughout the month you can split your savings between your cheques.
Consider your personality when choosing how you’ll put money away and where you’ll keep it. For example, if you find it hard to hang onto your money then automate your savings and put it where you can’t easily get your hands on it.
Move your money
Your money should be working for you. If it’s not, then move it to where it will.
Is your bank overcharging you? While most banks will charge a fee for most of their accounts, not all banks are the same. Take a look at the fees you’re paying and see if you can find a better deal elsewhere.
Consider the following factors when deciding whether or not to move your money:
• Interest rate your money is earning
• How your interest is calculated and paid (daily, monthly, on entire balance or part of the balance)
• Accessibility to your money
• Account keeping fees
• Transaction costs
Once you’ve got several thousand saved up you can choose to increase your returns by moving your money into a term deposit account where it can earn even more interest.
If it suits your particular situation you can choose to move back in with your parents or find one or more housemates to share costs. In short, be willing to make some short term sacrifices to acquire long term gains.
Sometimes buyers will overestimate how much they need to save. Could you get into a house faster if you made a smaller deposit and paid the lenders mortgage insurance?
Before making any assumptions speak with a “property savvy” financial advisor to explore your options.
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