How to boost your savings and increase your buying power

With people working from home more and going out less, they have more money in their pocket to invest. These new cashed-up buyers are now able to use their windfall to put down larger deposits and secure more favourable terms from lenders.

This is good news for sellers because the influx of cash-rich buyers has pushed property prices to record levels in some states. But it’s bad news for buyers, especially first-time buyers struggling to raise a deposit.

So if you are saving to buy a home, things just got that little bit harder. But don’t worry, by deploying a few simple savings techniques you can turbocharge your savings to help build a deposit much more quickly.

In this blog, we are going to share three simple saving and investing tips everyone can use to boost their savings without unnecessary risk.

Create a household budget

The first step in improving your savings is to work out how much money you have coming in and going out each month. This sounds obvious, but the fact is that most Australians don’t keep track of their expenses.

Start by creating a household budget to track your income and expenses each month. This will help you to identify expenses that can be cut without adversely affecting your lifestyle. You’ll be surprised just how many there are.

Managing a budget doesn't have to be hard. Some people prefer to keep simple records in a spreadsheet or handwritten ledger. But most people will probably find it easier to use an app such as Frollo or PocketBook.

These apps are easy to use and link to your bank account where they can automatically track spending. They also provide hints about improving your cash situation by recommending products and services that offer more competitive rates.

Develop a savings strategy

Once you have a clear idea of how much money you have available to put away each month, you need to develop an automatic savings strategy. Don’t rely on a manual system; it won’t work. You will forever find excuses to spend money.

One of the most effective automated savings strategies is the bucket approach. With this strategy, you create multiple bank accounts then automatically transfer money into them each month depending on your budget.

For example, create separate bank accounts for non-negotiable items (including; rent, mortgage payments and utilities), variable items (including; groceries and transport), discretionary expenses (including; entertainment and leisure activities) and savings.

You will also need a management account which is the one your salary gets paid into. Then it’s simply a case of allocating a budget to each account and transferring the money each month. Any leftover money can then be transferred into your savings account.

Your main account, non-negotiable, variable and discretionary accounts should all have their own dedicated debit/credit cards. This will make it easy to pay for daily living expenses.

But the savings account should be a dedicated savings account that accrues interest and does not have a debit/credit card. This will reduce the temptation of you dipping into it whenever you feel like treating yourself.

The above strategy is simple and effective. It allows you to keep track of your expenses, limit your spending and watch your savings grow. But best of all it is easy to manage because everything is done for you automatically each month.

Invest to accelerate growth

Saving is only half the story because, while low-interest rates are great for borrowers, they are bad for savers. This means you need to invest to maximise your returns.

The right investment strategy for you will depend on your risk profile and available time frame. Next, we’ll look at the most popular investment options for savers.

Bank-issued term deposit

This is an interest-bearing bank account that pays interest on deposits that are tied up for a defined period. The account holder cannot access funds during that time without receiving a penalty.

Advantages

This type of account pays higher rates of interest compared to a standard savings or checking account. They are a safe investment; there is no risk to your money.

Disadvantages

Your money is tied up for a defined period. Sometimes many years so you will not be able to access it without penalty.

While they pay higher rates of interest than a standard savings account, the returns are low compared to other forms of investing.

Managed index funds

A managed index fund can be actively or passively managed.

With an active fund, the manager actively buys and sells shares using their discretion in an attempt to mimic the performance of the underlying market. With a passively managed fund, the manager buys and holds securities of a benchmark index.

Passively managed funds have lower monthly costs than actively managed funds. But the higher returns of actively managed funds should in theory compensate for this.

Managed index funds differ from a non-index fund where the manager actively buys investments in an attempt to outperform the market. Non-index funds are riskier investments than index funds and are not an appropriate vehicle for savers.

Advantages

- Can provide higher returns than a savings account.

- Provides broad diversification of assets limiting the downside.

- A relatively safe investment compared to non-index funds.

Disadvantages

- Don’t offer as much flexibility compared to other investments such as ETFs.

- High minimum investment and monthly fees make them unsuitable for small investors.

- The upside is limited compared to non-index funds. But the risk to your funds is less.

Exchange-traded funds (ETFs)

Exchange-traded funds are a hybrid between individual stocks and index funds. Much like an investment fund, the investor invests in a range of assets from a specific class such as currencies, commodities and equities.

The difference is that ETFs are traded on the open market in the same way as stocks. This makes them much more cost-effective than buying individual units in an investment fund. As a result, the minimum investment and monthly management fees are much smaller.

Advantages

- Very low minimum investment (typically $500).

- Excellent diversification opportunities.

- Good liquidity, making it easy to access your money when you need it.

- Easy to buy and ideal for new investors.

Disadvantages

- Some ETFs are riskier than others. Investors need to do their homework to ensure they are not taking excessive risk.

Conclusion

Saving may sound boring but it’s the best way of building a deposit for your new home. And with many more high deposit buyers around these days, you do need to come up with a sizable deposit to secure the property of your dreams.

By using the above strategies you’ll be able to supercharge your savings allowing you to build a deposit much sooner. And hopefully, you’ll keep up these good habits for a lifetime allowing you to keep upscaling your property every five to ten years.

If you would like to know how big a deposit you need to secure your dream home, get in touch with our property experts today. We are Brisbane's leading boutique real estate agent with more than 20 years of experience selling homes in the area.

Get in touch by completing the contact form here or give us a call on 07 3054 7050.