How to avoid getting drenched on a rainy day – why savings and a budget really matters

Financial Planning, Investing, Lifestyle
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From the time we’re children, we’re taught about the importance of saving for a rainy day – or, that is, keeping some of money to the side for when we need it.

But somewhere along the way, many of us lose sight of that sage advice and opt not to have a safety net. It might be that our expenses are too high and there’s simply not enough left over to build a buffer. For some, we prefer living in the now and brushing off any worries about the later.

Last month, research by finance website Finder revealed 45 per cent of Australians, the equivalent of 9.4 million people, have less than $1000 in savings. Worse, the average amount held by this cohort was just $210 each.

If you’ve been inside a supermarket in recent times, you’ll know that amount doesn’t go quite as far as it used to. That many people have so little set aside for life’s unexpected expenses is a real cause for concern.

After all, as those who’ve had a mortgage over the past two years will know, household budgets can be swiftly thrown into chaos. After 13 interest rate rises since May 2022, the average mortgage holder is forking out about $1500 more per month, or a whopping $18,000 per year.

Not if, but when

Few would’ve expected the Reserve Bank to hike rates as rapidly and sharply as they did in 2022 and 2023, especially given the last time there were this many increases was more than three decades ago.

It’s even outside the worst-case calculations used by the financial regulator to help determine whether someone is a suitable home loan candidate. It’s a mechanism called the ‘serviceability buffer’ – or basically, the income someone needs to have to be able to pay three per cent extra in interest on their mortgage without going under. Those 13 interest rate hikes equated to 425 basis points, or interest rates that are 4.25 per cent higher than they were before May 2022. It’s quite a bit more than the buffer amount.

While households were battling significant increases in their home loan repayments, red-hot inflation also pushed up the cost of living, creating a double whammy that pushed many to the brink.

That many rate hikes and that severe a level of inflation are rare occurrences, for sure. But higher costs and interest rate rises in some form are to be expected during our lifetimes. Having a buffer can help take some of the pressure off.

A buffer is also crucial if some other unexpected event takes place. Someone might lose a job. There could be a death in the family. Maybe an unplanned (albeit much loved) child comes into the world. Injuries and illness that jeopardise the size or regulatory of an income or come with lots of expenses can also hurt household finances.

And then there are the surprises that are relatively small, in the grand scheme of things, like a car that needs major repairs or home repairs not covered by insurance.

The message is that when it comes to unplanned costs that can be a headache, it’s not a matter of if – but when.

Build (or increase) your buffer

If you want to build a buffer, or the one you’ve got is no longer adequate and you want to increase it, it’s important to work out your ‘number’ first.

Your ‘number’ is the amount you want to squirrel away in order to secure yourself. Opinions on how much is enough vary, but experts generally suggest having six months’ worth of mortgage repayments as a decent safety net.

So, if your monthly mortgage repayments are $3000, that’s $18,000. It seems like a lot, but with discipline and time, you can get that kind of money together and place it somewhere safe if – or when – you need to tap into it.

If you’re already saving money for something, divert it to your buffer until you’ve hit your ‘number’. Make it a priority in your budget.

That is, if you’ve got one

If you haven’t got a budget, make one now. Knowing your incomings and outgoings is absolutely crucial. You must have total knowledge of how your income is being spent, so make a list of bills and other costs.

Check bank and credit card statements to ensure you’re account for all your costs, big or small. And be aware of expenses that aren’t regular but that you incur, like children’s birthday presents, charity donations, and so on.

Are there opportunities to make savings? Maybe your mobile phone plan hasn’t been changed in a long while and there are cheaper options in the market. Maybe you could bundle some of your telecommunication products, like mobile, internet, and home or business phones, with one provider for a cheaper deal. Maybe other electricity or gas providers have lower rates.

There are often better deals out there on most, if not all, of your services. Make a list and conduct an audit. It’s time-consuming but absolutely worth it.

Look for any fat that can be trimmed. Are you getting Uber Eats multiple times a week? Do you drive to work and pay for parking when public transport might be a cheaper option? Are you paying for a streaming service you don’t really use? Have you got an addiction to buy now, pay later services?

Some banks will also offer perks for having all of your accounts linked with them, so it’s worth checking if yours does.

And when it comes to where you keep that buffer stored, consider putting it in an offset account linked to your mortgage. It’ll reduce the amount of interest you’re paying.

If you’re worried…

Should you find yourself in a precarious position with your mortgage repayments, the absolute worst thing you can do is… nothing. Don’t stay silent and hope things magically get better, because they rarely do.

It’s worth talking to a qualified financial expert about whether there are savings to be made on your home loan. If you haven’t reviewed your loan structures in a long while, there might be better deals out there. The mortgage market is very competitive at the moment and some lenders are rolling out the red carpet to new customers, offering enticements like discount interest rates and cash-back bonuses.

If you’re really struggling, talk to your bank about how they can help. No lender wants their borrowers to fall into arrears. They especially don’t want anyone to default on their mortgage. Every bank will have their own processes in place to assist customers, including repayment holidays or pauses.

And finally, it’s a last resort, but one that a few in particularly bad situations will have to consider. Sell. If all else fails, it might be worth getting out before you’re in too deep. Again, speak to an expert about your options.

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Andrew Mirams