Saving
Saving is where it all starts. Without saving you can't pay off your high interest debt or accumulate a deposit to make that first investment. So, before you can go anywhere on your road to financial independence or retiring early, you must get yourself in a position that you save a substantial amount of your weekly or monthly income, as an absolute minimum 10%. If you are serious about what you want to achieve then 20% or 30% is really where you need to be. Once you have your first investment in place and it starts to generate returns, things get easier, but don't relent - keep saving and use the extra income from your investment to make the next and so on.
Ever since I got serious about wanting to retire early, we have managed to save between 40% - 50% of our monthly income. If you think that is high, have a look around on the web and you'll find that people on less money achieved even higher savings rates, so don't tell me it can't be done. It can. If you're committed to your goal.
So, if you're committed and willing to make different choices then how do you start turning things around? Read the next sections on Debt, Interest, Making a Budget, Investing and finally on making a Money Action Plan. But before you do, spend a few minutes educating yourself on what is going on in Australia and the wider world in terms of household savings.
International Saving Rates
A research discussion paper published by the Reserve Bank of Australia in 2006 analyzed the savings rates in a group of OECD countries. This study concluded that over the past decade a steady decline in household saving rates has been witnessed in some OECD countries but not in others. The study revealed that this trend has been most pronounced for four English speaking industrialised countries – that is, Australia, Canada, the United Kingdom and the United StatesHave a look at the graph below, which shows the household savings rates (in percent of disposable income) in selected OECD countries between 1965 and 2005 in three groups:
Source: Research Discussion paper RDP2006-07, Household Saving and Asset Valuations in Selected Industrialised Countries, Paul Hiebert, 2006, Australian Reserve Bank
However, it is not all that simple or all that bad. Traditionally the way that savings rates are determined means that they exclude capital gains, so if you invest your money in property and make a tidy capital gain over time that increase in your net worth will be excluded from the savings rate calculation. Fair enough you might say as you're not really saving it from your income, true, but if you had put your money in the bank the interest / dividends you would have received are included in the savings rate, so that is not consistent.
In a Statement on Monetary Policy in May 2006, the Reserve Bank of Australia explained the above and actually determined some alternative savings rates which included capital gains, but these numbers are not terribly accurate either as they exclude equity withdrawal for purposes other than property purchases and will therefore be on the high side. However, have a look at the 3 graphs below and you can clearly see that the real savings rate is not nearly as low as conventional savings rate you take into account capital gains made through equity or property investments.
However, it is not all that simple or all that bad. Traditionally the way that savings rates are determined means that they exclude capital gains, so if you invest your money in property and make a tidy capital gain over time that increase in your net worth will be excluded from the savings rate calculation. Fair enough you might say as you're not really saving it from your income, true, but if you had put your money in the bank the interest / dividends you would have received are included in the savings rate, so that is not consistent.
In a Statement on Monetary Policy in May 2006, the Reserve Bank of Australia explained the above and actually determined some alternative savings rates which included capital gains, but these numbers are not terribly accurate either as they exclude equity withdrawal for purposes other than property purchases and will therefore be on the high side. However, have a look at the 3 graphs below and you can clearly see that the real savings rate is not nearly as low as conventional savings rate you take into account capital gains made through equity or property investments.
According to this analysis the revised savings rate based on increases in net financial wealth averaged out over the period 1994 - 2004 was a magnificent 18.5%. As the RBA says themselves these numbers are probably overstated, but the point is that the traditional savings rates as published are not reflective of what is happening in the Australian economy.
And a even more interesting comment the RBA makes in the last part of the article, is that countries with high traditional savings rates (like Italy, France, Germany and many Asian countries) are typically countries where people invest their monies in bank deposits or fixed income instruments. Countries like Australia, the UK or the US with very low traditional savings rates are exactly those countries where people tend to invest a large amount of their savings in equity or property investments.
And a even more interesting comment the RBA makes in the last part of the article, is that countries with high traditional savings rates (like Italy, France, Germany and many Asian countries) are typically countries where people invest their monies in bank deposits or fixed income instruments. Countries like Australia, the UK or the US with very low traditional savings rates are exactly those countries where people tend to invest a large amount of their savings in equity or property investments.