This article has been written by expert contributor Robin Bowerman, Head of Corporate Affairs, Vanguard Australia
Knowing how much to save is important but how regularly you save is equally so
When it comes to the topic of spending and saving, it seems like there are countless ways of doing it.
A quick internet search throws up guidelines around how much of your income you can spend and how much you should save. Some articles focus on a percentage rule – with the most common being the 50/30/20 breakdown where 50% goes towards essential living expenses such as rent and utility bills, 30% towards your everyday expenses such as entertainment, eating out and clothing, and then allocating the remainder 20% to your savings. And then there are other guidelines which adjust those percentages according to your age – suggesting that you should save between 25-35% of your income if you begin your savings journey in your early 40s.
But many of these articles gloss over one very important point – and that is, knowing how much to save is important but how regularly you save is equally so, if not more. Learning to save and doing it regularly is not something that everyone does naturally, especially if you’ve just started working and you feel like there isn’t much left to save after all the essentials have been accounted for.
But saving regularly is a habit that needs to be cultivated and as with most things in life, starting sooner rather than later often gives you a huge advantage, assuming this is a habit that you stick to through your working life.
If you’re not yet convinced, the illustration below might perhaps change your mind and push you a little closer to building a habit that could set you up for life.
The power of regular contributions
The chart shows that investing $10,000 in 1980 in a broadly diversified fund and leaving it untouched for the next 40 years would have delivered approximately $800,000 at the end of the four decades, thanks to the tried and true investment principle of staying the course.
However, the chart also shows that regularly contributing $250 or $500 every month to that initial $10,000 would have resulted in a portfolio balance of $2.7 million or $4.5 million respectively. While the chart does not take into account the cost of fees and assumes that all dividends are reinvested, it really paints a picture of how regular contributions could make a significant difference to your overall goals.
If you’ve just started on your savings journey, putting in place a set-and-forget system such as an automatic transfer to your savings or investment account each payday could be useful. That way, you don’t have to make any decisions about saving more or spending more each month. For those wanting to take less of a hit to your take home pay, consider contributing your pre-tax pay to your super fund (noting that you won’t be able to draw on those savings until you retire, aside from exceptional circumstances).
It is important to note that saving is different to investing
Finally, it is important to note that saving is different to investing, particularly if you have a short-term savings goal. If you are saving for a goal that has a time horizon of less than five years, be highly aware of the risks that you are taking on if you decide to invest those savings into the financial markets. But if you have a goal of more than five years, then consider the potential benefits that regular investing in a broadly diversified portfolio could deliver, because time is on your side.
Robin Bowerman is the Principal, Head of Corporate Affairs at Vanguard and a member of Vanguard’s executive team.
In his current role, Robin leads the corporate communications and government relations functions of the business and plays a key role in Vanguard’s long-term strategy development. Robin joined Vanguard in 2003 as Head of Retail and played a pivotal role in the growth of Vanguard’s retail business and the products and services offered to financial advisers and retail investors, as well as overseeing retail sales and marketing.
Robin is a key spokesperson and experienced presenter for Vanguard, with expertise in investor education, funds management, self managed super funds, product development, industry and regulatory affairs related topics. Learn more about Vanguard here.
The above material has been republished with the permission of Vanguard Investments Australia Ltd.