Saving is never an easy thing to do and saving for a deposit on a home is twice as hard. However, with the right strategy in place, your savings can grow and grow, cutting the waiting time to your own home in half.
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In recent years house prices have skyrocketed, making the size of the deposit required for most home buyers substantially larger and just that much harder to get together. As a result homebuyers need to be shrewder when it comes to their saving and banking habits.
There are two ways to save your deposit faster: Save more or spend less. It's that simple. Here are some ideas to get you started on the path of home ownership.
Work out your budget
While many people would consider their home or their car to be their most valuable asset, it's your ability to earn an income that is most important in shaping your financial future.
Statistically, two thirds of working Australians will suffer an injury or illness that will sideline them for 90 days or more.
The majority of these people would not be able to pay their mortgage or meet car finance and other loan commitments without adequate income insurance.The hardest thing about saving is doing it systematically. You don't mind putting your spare change in a jar each week but it's very hard to motivate yourself to save for a deposit because it usually means giving up things that you like. The key here is to budget sensibly by putting together a realistic savings plan that doesn't compromise your family's lifestyle too much.
This step shouldn't take too long - a couple of hours at most. Work out your monthly income and expenses. Estimate your regular expenses such as transport, groceries, lunches, childcare and so forth. Don't forget any debts, which you may be carrying including credit cards, car loan or anything else that you have to make a repayment on.
The hardest part is identifying and cutting out unnecessary expenses. Work out what luxuries you enjoy that you can reasonably afford to give up. You don't realise how much money you waste on consumer goods that do not really add value to your lifestyle. Think about things such as newspapers, coffee, lunches, snacks and a million other things that you waste your money on. Add it up and you'll be shocked.
You don't want to give up everything but even cutting back on say a newspaper (read it on the net), bringing lunch from home three times a week, avoiding the chocolate bar (it's fattening anyway) and reducing your alcohol intake by one drink a night means you will save about $2700 a year. Cut out the coffee break and a packet of cigarettes a day there's another $3500 a year just there. Not bad for just a few slight changes in your spending habits. And you'll be healthier too.
Manage your debts
There is no doubting the convenience of credit cards when you are running a little short. They're handy to use and accepted almost everywhere. While it's surprising just how easy it is to get one, it's not so surprising to understand that there are a lot of people out there that cannot manage and reasonably afford to use a credit card.
But do you really need one? If so, how many are you using? And what about personal loans, car loans and interest free purchases? Face it, without credit you wouldn't own half the stuff you do but on the plus side, think about how much bigger your deposit would be if you hadn't spent all that money on consumer goods.
Remember, you can't save effectively if you are paying off debts. So cut down on those credit cards, consolidate your debts and do everything you can to become debt free. For tips on debt management see our article "xxx" starting on page xx.
Sort out your banking
It's a commonly known, though rarely thought of, fact that most banks charge fees on most of their accounts. The most popular form of saving for first homebuyers just starting out, is to open up an at call deposit account. These are available from most traditional lenders, such as banks, building societies and credit unions.
The advantage of at call accounts is that your money is available whenever you want it. Avoid putting your money away in just any bank account. While it's great to choose an account which pays a good interest rate, there are other factors like account keeping fees, transaction costs, when interest is calculated and accessibility that you should also consider.
FIVE THINGS TO KNOW ABOUT BANK ACCOUNTS
- Interest calculated daily - Make sure the interest in your account is calculated daily. Some bank accounts still pay interest on the monthly balance, which really means you will get interest calculated on your minimum monthly balance.
- Interest paid frequently - The more frequently interest is paid, the better the return on your savings. This is because the interest 'compounds' or accumulates on itself.
- Don't fall for stepped accounts - Many banks have deposit accounts, which pay the full interest rate on every dollar in your account. This is good. Some however offer different interest rates on different portions of your account and should be avoided unless you can be sure that you will always have a balance big enough to attract the highest interest rate.
- Fees and charges - Fees and charges for writing cheques, making deposits or withdrawals all add up. Look for an account which is free of charges or which allows a number of free withdrawals each month.
- Transaction accounts - If you're likely to make a number of transactions each month what you really need is a transaction account with low or nil charges.
To cut down on your transaction fees:
- Pay your bills with automatic debiting from your account as this is usually a free service.
- Use EFTPOS to access cash when shopping as it only counts as one transaction.
- Avoid using another bank's ATM for your transactions as the charges are higher.
When you are ready to do some serious saving
Once you have saved a few thousand it's time to move to the next stage of your saving strategy - the term deposit. While you don't have the same access to your money as you do with at call accounts, the interest rate is better which means you are saving up for that magical home loan deposit a whole lot faster.
These accounts typically offer a fixed interest rate for a fixed deposit amount over a fixed term. What this means is that you put your money into an account and effectively leave it there for an agreed term - anything from seven days to five or more years. You are able to access it if you really need the money but generally you only have access at the expiration of the term.
Benefits of a Term Deposit Account
The idea of locking away your money at first might seem a little unattractive, but there are a number of good reasons for doing it.
The very reason which makes a term deposit appear so unattractive is the very reason which makes it useful - your money is locked away, safe from any temptation.
When you open a term deposit account, the interest rate is largely determined by the length of time you agree to leave you money in there. Generally, the longer the term the higher the interest rate.
There are usually no account keeping fees. As you cannot put money in or take money out of the account, there are also no transaction fees.
You can arrange to have your term deposit roll over to another term deposit automatically, avoiding any hassles of having to withdraw your money and then reinvest it.
You choose the term you want.
Because your rate will be fixed for whatever term you decide to fix it for, if interest rates in the market go down, your rate won't budge.
On the downside, if you need your money for whatever reason before the term is finished you will be penalised for withdrawing it.
Be warned though, some term deposits offer a portion of the deposited amount at call but tend to offer lower interest rates than standard term deposits.
Practical Tips
When you are saving remember that every little bit counts. A good saving strategy is like a marathon, it doesn't matter what you do in the short term as long as you finish the race - save sufficient deposit to buy your own home. Here are some trips to help you save more effectively:
- Develop a budget and savings strategy
- Start as early as you can. The sooner you start, the more time compound interest will have to kick in and help build up your savings
- Every little bit counts so make sure you maximise your opportunities to save
- If you are renting, try to get out of rented premises as soon as you can. Rent is wasted money
- Try and save at least 20 per cent of the purchase price so you can avoid paying lender's mortgage insurance
- Make sure you have a demonstrated savings history - lenders will not lend you money if they don't know you are responsible when it comes to finances
- Pay off your debts. Yu can't save if you are paying of other loans
- Give something up that you don't really need. Work out ways to save small sums of money regularly and add them to your savings. If will help establish a savings history and boost your savings
- Find the right account. Remember you can get better returns over a mid-long term period of time with non-banking financial institutions but must balance risk against return - and you may not get a positive return.
- Share returns historically outperform other investment types over time but are volatile and may have large establishment fees. If you have time before you buy, it's an option worth considering
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PARENTS HELPING THEIR CHILDREN
There's nothing more satisfying to a parent than being able to give their child a head start in life. With house prices going through the roof, it's a big ask to expect parent to stump $50,000 or even $50,000 in cash to help their children buy a place of their own.
But what if the parents had started putting a little bit aside from when the child had been born? Just imagine how much could have been saved in all that time. The illustration below says it all:
- Initial investment amount - $1,000
- Additional monthly amount - $100
- Terms: 10, 20 and 30 years
- Investment: 5 per cent (cash); 10 per cent (growth assets)
- Tax and inflation: N/A
- Period (years) 10 20 30
- Return (5%) $31,788 $67, 279 $125,089
- Return (10%) $46,083 $139,674 $382,423
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First homeowners grants
Most first homeowners are eligible for a tax-free First Homeowners Grant - and that's a nice bit of help in anyone's language. The requirements will vary from time to time and from State to State but the fundamentals are fairly simple:
- You can't have received the grant before
- You must be at least 16 years old
- You must be an Australian citizen
- You can't have previously owned a residential property; and
- You must occupy the home as your principal place of residence within 12 months of settlement or construction.
- There may also be other state scheme's you might qualify for, so ask about those too. For example, in New South Wales, you may be eligible for the First Home Plus initiative, which provides substantial exemptions or concessions (on a sliding scale) on stamp duty, so they're worth checking out.
Parents and family
Parents and family are usually a good source of assistance, whether monetary or otherwise. Parents or other family members may be able to help you get a deposit together either by way of gift or interest-free loan. Even a few thousand will be a tremendous advantage to your savings strategy so never scoff at a helping hand.
Another tangible way family can help is by providing you with rent-free accommodation. For example, if you are paying $300 a week in rent, 3 years of rent-free accommodation adds up to $46,800. This is a gift worth its weight in gold so if you have the opportunity to take advantage it, do it.
Housesitting
If you don't have the advantage of rent-free accommodation, there's something almost as good. It's called house sitting and it allows you to live in and maintain another person's home in their absence in return for (normally) rent-free accommodation.
A typical arrangement may last from a few days to a few weeks through to 12 months or even a few years. The cost to you is minimal - worked out on a case by case basis - and may involve you having to look after the owner's pets or garden. Usually you only have to pay the standard utility bills (electricity, gas, phone), or for longer arrangements some of the long-term bills such as council rates and water rates and perhaps a token rent.
You will be required to pay a deposit which is refundable when the owners return to their home - provided of course that it is in the same condition they left it. Many houses are in beachside suburbs or the better parts of town and it doesn't get any better than that.
If you are interested in house-sitting or learning more about house-sitting opportunities, you can get more information from the following services:
- Australian House-Sitter's Directory (AHSD): www.housesitters.com.au or by telephone 1800 502 502.
- Peoplebrokers: www.peoplebrokers.com.au or via telephone on (03) 9826 6800.
- Happy House-sitters: www.happyhousesitters.com.au, and
- Housesit World is a world-wide online directory for house-sitters: www.housesitworld.com.au
If you want to really get ahead in saving a deposit you need to everything you can to save. This may mean cutting down on your expenses, moving in with your in-laws and even getting a second job. There's no easy answer to the question but if you persevere you'll be years ahead that if you didn't do anything.
Up-to-Date Records & Paper Trial - It is essential that you have proper systems and a paper trial to support all your financial objectives. Having up-to-date records and knowing where to locate paperwork quickly will save you a fortune in the long run. Not only will you be able to quickly pick up any mistakes in billing, but you will have a handle on cash flow and therefore eliminate payment defaults or additional interest costs that directly impact on your bottom line.
If you're thinking about rolling over or consolidating your super accounts, need investment advice, help setting up or administering a self-managed fund, we can help save you time and money.
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