Be honest. Are you a spender or saver?


Are you a spender or saver? Do you find it hard to stick to a budget? Do you find it difficult to save towards a goal? For some people, saving money comes easy to them. For others, it’s like pulling teeth.

You might need to adopt a different investment strategy depending on your answers to the above questions.

Success requires some income

Surplus cash flow is oxygen for any financial strategy. Without it, no financial strategy can survive. As I have said in the past, it is critical that you contribute a certain amount of your income towards building your financial future every fortnight, month and year. It is virtually impossible to build wealth without surplus cash flow. Therefore, if you are spending as much as you earn, you cannot expect to get ahead financially.

Basic steps

Most people are smart enough to realise that wasting money is stupid. The problem however, is that if you don’t know where your money is going how do you know if you’re wasting it or not? And that is the most common mistake that people make – not knowing where their money is going. Worse still, I find that most people consistently underestimate how much they spend. If you’re underestimating how much you spend, then possibly you’re also underestimating how much money you’re wasting. You cannot manage what you do not measure. Therefore, at an absolute minimum you must sit down every six months to understand exactly where your money is going – even if it’s at a high level. In my new book Investopoly, I have dedicated a full chapter to helping people improve their cash flow management. I provide a screenshot (click to enlarge) of page 34 below which sets out how to review your last three months of expenditure.

investopolyIf you’re a spender

There are a couple of investment strategies that spenders will find it easier to stick to. The key theme in all of them is to do what Warren Buffett tells us to do which is to “invest first and then spend what’s left over”.

Idea 1: Make additional super contributions

One thing you can do is contact your payroll department and ask them to deduct a certain amount of money from each pay and contribute that into super (as a concessional contribution). This is also a tax effective strategy as any contributions are taxed at 15% instead of your marginal tax rate (for people earning less than $200,000 per annum).

Technically, depending on your age and financial position, it may not be a high priority for you to make additional super contributions. For example, maybe it’s more important for you to repay your home loan. However, if the reality is that you would just spend the money that you could have otherwise contributed into super (and not make extra home loan repayments) then perhaps making additional super contributions is a good thing for you to do i.e. forced savings mechanism.

Consider this case study to demonstrate how effective it can be:

Susie is a 30-year-old earning a salary of $100,000 a year. Therefore, she is already contributing $9,500 per annum into super (i.e. her employer’s contributions). If Susie contributed an extra 3.5% p.a. of her gross salary (i.e. $3,500 p.a. or $67 per week), by age 60, her super balance would be 32% higher ($965,000 versus $1.27 million). That is a big reward for a relatively small sacrifice that will probably go unnoticed i.e. no adverse impact on your standard of living.

Idea 2: Borrow to invest in property

Borrowing to invest is a good forced savings mechanism. I’m not suggesting that people go out and borrow money without having any regard to their ability to meet the loan repayments. However, from my own personal and professional experience I know that there is merit in forcing yourself to enter into such a commitment (mortgage) – particularly if you’re a spender.

If you borrow money to buy an investment property, it is likely that the net rental income will be less than the interest expense. Therefore, you will have to use some of your cash flow to meet the investment property’s holding costs. As long as the property is investment-grade, your monthly cash flow contribution will eventually translate into a significant amount of equity (as a result of capital growth).

Idea 3: Convert loans to P&I

If you already own an investment property and feel that you’re not as disciplined as you could be with your cash flow management, then perhaps converting your investment loan repayments to principal and interest (P&I) might provide two benefits. Firstly, it will significantly reduce your interest costs and secondly, it will force you to reduce your debt.

Idea 4: Delink your offset account from Internet banking

The saying “out of sight, out of mind” rings true when it comes to financial management. One strategy that employs this approach involves establishing an offset account (linked to one of your loans) and using it purely for savings. You then ask your payroll department to deduct a regular amount from each salary and deposit that amount directly into this new savings offset account. You can also remove this offset account from your Internet banking profile so that it is out of sight and out of mind. Automating the process (via payroll) together with this ‘set and forget’ style arrangement will likely make this strategy successful.

Spenders aren’t bad people

Just because you’re a spender doesn’t necessarily mean you’ll be unsuccessful with building wealth and having a secure financial future. Instead, it just means that you probably need to employ a slightly different approach to savers.

The key thing is just to be realistic about the level of your financial discipline and seek independent financial advice.