In an earlier post, I wrote about how to design a budget to meet your needs and enable you to start saving money.
In uncertain times, such as this, having a budget is even more essential. You need to know how much your life costs and how long you can sustain it – especially if you are one of the many people who has recently lost their primary source of income, or if you think that might be happening to you in the coming months.
Ideally, wherever you income is now coming from, your income should always be greater than your expenses. And this means that you now have savings, so where should you put them?
There is no simple way to answer this question and it will depend on you as an individual and your circumstances. The main answers and their relative merits and issues are described below.
1. Pay off debts
If you have any amount of consumer debt (credit cards, personal loan, car loan) then this should be your very first priority. Paying off these debts will decrease your expenses and enable you to save more in the future.
Of course, there are some debts that you may choose not to pay off straight away. These are usually a home loan and a HECS debt (Australian government student loan), although if you have other debts with very low interest rates (below 5 percent) you may choose not to pay these off. This is your own choice and should depend on what earnings you expect to receive on other savings.
The pros: You now have fewer expenses, a better credit score, and one less thing to keep you up at night
The cons: If the interest rate was low, you may have been spending that money for nothing.
2. Save money into a high interest savings account or a mortgage offset account
One of the safest places to keep money is in a high interest savings account. The risk that you will lost money is very low, although you also might not be making much interest on your money – at the moment, most savings accounts are earning under 1%.
Having money is a savings account is very convenient if you need to access it quickly – for example, if you have lost your job and you need some money to get you through this rough patch.
For this reason, a savings account is a great place to store your emergency fund. An emergency fund is an essential safety net to ensure you can withstand the twists and turns of life. I suggest having at least 6 months worth of expenses sitting in an emergency fund in case anything happens that reduces your ability to earn money.
If you are a homeowner, you may have access to an offset account. An offset account is magical and everyone who can should ensure they choose a mortgage that has an offset account. An offset account reduces the amount on your mortgage that the bank is charging you interest on. For example, if your home loan amount is $400,000 and you have $50,000 in your offset account, the bank will only charge you the interest on $350,000.
An offset account is like paying off your mortgage early, but being able to withdraw the money at any time. It is an excellent place to store your emergency fund, as well as any other savings. Also, the interest rate you earn is equivalent to the interest rate on your mortgage, which could be anywhere from 2 to 5 percent.
The pros: Low risk, money is easily accessible, great place for an emergency fund
The cons: The interest rate is usually low
3. Invest money into the share market
Investing into the share market is often daunting for beginners who see it as a large casino that could take all your money at a moment’s notice. And the truth is, if you treat the share market like a casino, it can be one. If you’re looking to get rich quick, you might just find out how quickly you can get poor.
However, there are responsible ways to invest as well. You can research companies very thoroughly before purchasing their shares and look at large companies that you are confident in.
Alternatively, you can buy shares that give you a small piece of a range of different companies. Two ways to do this are through purchasing listed investment companies (LICs) and exchange traded funds (ETFs). I will link to the Australian government money smart articles about LICs and ETFs so you can read more about these.
There are a number of great options for purchasing LICs and ETFs on the Australian share market. I strongly recommend reading Strong Money Australia’s articles reviewing different LICs to help you make your decision here.
At the moment, shares are on sale! The share market has taken a big loss lately and it’s possible that it will continue to lose value as our economy struggles through the next year. This may be a great time to start investing, depending on your circumstances.
However, if you want your money to be available to you in the next five to ten years, investing in the share market may not be the right option for you as it does move up and down. Taking your money out when the market is down may mean that you lose a large amount of money so make sure you’re ready to commit to the long haul if you’re choosing this option.
The pros: Higher interest can be earned, regular dividends may be paid to you
The cons: Money is tied up and not easily recovered
4. Make additional payments to your super
About a year ago, I wrote a post on why you might want to consider salary sacrificing into your superannuation account. If you have not yet done this or are still under the cap, you might want to choose to put your additional savings here so that it’s there for you when you need it in retirement.
However, if you thought accessing your money in the share market was difficult, that’s nothing compared to accessing your money in super. Generally, this money will not be available to you until you are of retirement age so it definitely isn’t somewhere to put your emergency fund or the deposit you’re saving up for a new home.
On the other hand, your super account may be earning a very high interest rate, depending on how it’s invested, and there are also tax advantages to making additional super payments. So if you’re making an investment for your long term future or are nearing retirement age, this may be your best option.
The pros: Tax advantages, good interest rates
The cons: Not accessible until retirement