Through working hard and saving effectively I managed to buy my first investment property at 19, my second at 21 and then my own home (with my husband, Tomas) at 24.
By following the lessons below I believe anyone can learn to build up their savings. And, if they invest them wisely, can generate a passive income at any age!
Lesson 1: Choose your goal and believe you can do it
There is no possible way you will budget properly and put away savings towards a goal if you don’t believe you will ever be able to reach that goal (or if you don’t have a goal!) Getting yourself in this mindset is the hardest part of saving. My favourite way to motivate myself is to read articles about how other people have achieved their goals and try not to make excuses for myself. I used to find I’d read about amazing achievements and automatically justify why I hadn’t achieved the same or better. Instead, now I try to focus on what I can take away from the story and what good strategies I can copy.
Lesson 2: Track what you spend
This is often where people go wrong with their budgeting. You can’t first jump straight to allocating amounts for different expenses if you have no idea what you already are spending in those areas. My rule of thumb is to track your variable expenses for at least a month without making any changes to your spending habits. MoneySmart.gov.au has lots of great resources including a “Track My Spend” App. This will mean that when you come to do your budget and find last month you spent $500 on shoes, you will know allocating $20 for clothing will definitely not be enough.
Lesson 3: Start a budget and amend it constantly
A budget is not a tool you do at the beginning of a new year or at a specific point in time and then you’re stuck with it. This is where a lot of people go wrong because if they make their budget too restrictive, they go over budget a few times and write the whole thing off. If you find you’re exceeding one category, i.e. eating out, and you just can’t cut down, it’s time to re-visit your budget and re-jig it. Can you change the allocation from a different category? For example you could try spending less on petrol by going to restaurants closer to home. Or choose BYO places so you’re not spending as much on alcohol but still enjoying the eating out experience. Or perhaps you have cut your budget too fine and need to decrease your savings and increase your spending. That is fine. You didn’t fail at budgeting and you shouldn’t give up on the process. Just adapt your budget and see how you go.
Lesson 4: Invest your savings wisely
Lastly, once you’ve managed to accumulate some savings (i.e. a few thousand dollars), work out what you want to do with it. Interest rates are ridiculously low right now which means if you leave your savings sitting in a normal bank account, you are probably losing money. Personally, I choose to invest in property because I’m most comfortable there, but the most important lesson is to work out which investment works best for you, taking into account your own preferences as well as your ultimate goal for your money. Property is a long-term goal which usually requires a lot of money up front so it won’t work for everyone. It may be that salary sacrificing into your super is best for you, or investing in a managed fund. Investing wisely doesn’t mean investing in a particular way; it just means not trying to make quick-money. Always remember, high-returns = high risk!