How saving helps us reach our financial goals

Charlie Munger once said, ‘Spend less than you make; always be saving something. Put it in a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer’.

The above quote is as simple as it is wise, though maybe one phrase that needs to be explained is the “tax-deferred account”, which is US terminology for an investment or retirement account, that allows you to postpone paying taxes on the money invested, until the money is withdrawn down the track.

So, if we ensure our expenses are less than our income, and save the surplus and invest it, it will compound over time and help us to achieve our financial goals.

However, with the cost-of-living pressures rising, saving for financial goals is becoming increasingly harder.

Cost of living

In Finder’s recent Cost of Living Report 2023, it was found that households are paying 7.8% more for goods and services in Dec 2022 compared to the same period in 2021. In addition, rate rises have added over $12,000 to the annual cost of servicing a $600,000 mortgage.

The report says that 78% of people have reduced their spending to cope with the cost of living. The main ways that people are reducing their spending, is by cutting back on groceries, holidays, entertainment, food delivery and petrol.

The best way to navigate the cost-of-living challenges is to have a budget, and examine it closely to see where savings can be made. If you don’t have a budget, you can easily set one up in an Excel spreadsheet.

Finding ways to save and improve your financial position, can be a very rewarding activity, and also help you achieve your financial goals. Additionally, the good savings ideas and habits we learn through these times, can stay with us a lifetime.

Financial Goals

We all have financial goals. It could be saving for retirement, saving for a house deposit, saving for your child’s education, or simply saving to grow your wealth. We may even have a financial goal to pay off a loan or a credit card.

Setting goals can act like a roadmap in that we align our focus with a clear direction and a greater purpose. It also helps us develop new habits.

When we set our goals, we should ensure they are SMART. That is, Specific, Measurable, Achievable, Relevant and Time-bound. An example of a SMART goal is to save $20,000 for a holiday to Europe within 3 years.

Once we know how much we need to save, and the time we have to do it, we can then work out how much we need to save each month to achieve that goal.

For example, to save $20,000 in 3 years we would need to save around $555 per month. If we were to invest that money as we went along, we may even be able to achieve our goal a little quicker.

Once we know the amount we want to save monthly for our goal, and we have the surplus available in our budget, we can make a habit of setting this monthly savings aside (in say a separate account), or we can invest it and watch it grow.

One day and hopefully soon, financial conditions will improve. In the meantime, we should adjust our budgets where we can, but also keep our eyes on our financial goals.