How to save effectively without budgeting

RedHouseWe sometimes get queries about what is the best way to budget and save for a home.  Unfortunately most budgeting systems require you to (1) measure what you spend and then (2) work out what is left over (which usually isn’t much) and that is your savings!

If you are disciplined, and self motivated, then it can be possible to save this way.  Unfortunately most of us are not that organised – and similarly it is the same issue most people have when they have to lose weight or get fit.

However this is the method that I used when I was saving to buy my first house.  Its based on the “pay yourself first” principle.

The benefit of this system is that it requires very little analysis of what you actually spend your money on, and it also forces you to save money.  And your lifestyle may not need to change by much.  This method also helps you build a savings track record for lenders when you are ready to borrow to buy your first home.

The method works like this.

1 – Calculate 10% of your salary, and see if you can live on the remaining 90% of your salary.  If you think you can, then…

2 – Get your employer to pay you only 90% of your salary to your normal bank account, which you continue to use for your bills, food and other expenses.

3 – Ask your employer to divert the remaining 10% of your income into a separate bank account.  This is your “investment account”, and the “pay yourself first” part of the method.

You are not allowed to touch the balance of this bank account, and only allowed to use the funds for either investing (eg buying shares) or as a deposit for your first home.  If possible, choose a high interest savings account for this, as you will not be making withdrawals, you should choose a high interest account with nil fees.

Over time, you may find that you can survive on the 90% of your income, without too much trouble.  As 10% of your income is going into another savings account, it is a type of enforced savings program.

And if you want to accelerate your savings program, then it is just a matter of increasing the amount that you divert into your investment account by notifying your employer.  For instance, it may be possible for you to live comfortably by having 16% of your income diverting to your investment account.

The beauty of this method is that you don’t have to worry about tracking what you are spending your money on, as you have already allocated a percentage of your income to a savings/investment account.

And by not making any withdrawals (except to purchase investments or term deposits), you can quickly build up a healthy balance, as well as building a savings history to show any lender when you are ready to buy your first home.

Contact us if you have any questions about how much you need to save to buy your first home.