Do you want or need to save more money? Or increase your investments?
Many finance professionals advise a savings rate of 20% of post tax income. It seems about right for many, not the extreme savings of 50-90% (FI crowd), but enough to achieve an independently funded early retirement.
Your target savings rate is a personal choice, based on your goals, timeline and commitments. Most will not easily achieve their target and often are reluctant to make large sacrifices.
But is possible to increase your savings rate with little standard of living compromise.
Introducing a money management system to trap savings, optimizing tax and being more conscious about your spending are low hanging fruit to increase your savings rate with minimal effort.
Next, consider the big ticket items and decide whether you are getting maximum value. Eliminate as much waste as possible (you’re not going to miss throwing spoiled groceries in the bin!)
The easiest way to increase savings after these steps is to commit to saving a set percentage of each future pay rise. Through committing 50%+ of pay rises to savings, your savings rate will increase significantly over the years without any loss in lifestyle.
This is an extremely powerful method for doctors in their junior years, who will experience large jumps in their pay over the next 10 years.
How to Manage Your Accounts - Introduce a Money Management System
The idea of a money management system is to capture spare income automatically, instead of allowing it to be spent unconsciously. It will also help you avoid overdrawn fees and direct debit failures.
I like the Barefoot investor option which uses an electronic version of splitting earning into separate buckets (accounts) for different uses (but I use mortgage offsets for all my “Buckets)”.
There is also the Empower wealth version which encourages use of offset accounts.
The essential components of both is to separate budget needs from wants.
Both require you to set a budget for discretionary spending, transfer the money in to a separate “discretionary account” regularly and only spend out of that account for discretionary items. No unplanned refilling of the discretionary account allowed!
What is discretionary spending? Anything that is not essential for the household – dinner and drinks, take away coffees, lunch from the canteen, concerts, holidays, upgrading house décor/furniture, clothes apart from basic replacements.
There are many grey areas – groceries are essential, but the chocolate and soft drinks brought at the same time are discretionary. Fuel to get to work may be an essential, fuel to drive interstate on a road trip clearly not.
In the Aussie Doc household, we have all income coming into a single account offset against our mortgage, out of which come all bills and essential spending.
From that income account we direct debit into savings, investments and separate discretionary spending accounts (separate for house, holidays individual) all offset against our mortgage. We ensure there is always a minimum buffer in this account to make sure we never get overdrawn
Most essential expenses go on credit card (for points) and we monitor spending to watch for discretionary slippage within our “essential” spending. Credit cards get paid off monthly automatically.
Both adults in our household have the same monthly discretionary spending money, and spend it however we like, without guilt. I think this is so important in sustainability of savings.
It is very worthwhile to read the two approaches, and work out which (or a combination) suits your household. Make it your new years resolution to never pay another overdrawn fee!
Pay Less Tax
An intern earning $70,000 will pay around $14,000 tax per year. Fully fledged specialists will pay eye watering amounts if they earn enough to pay up to 47% tax.
Improvements in tax efficiency can create significant savings without reducing lifestyle at all. Consult your accountant on what you are able to optimize, below are some topics for discussion
Maximize Tax Deductions
Money spent in order to earn money is usually tax deductible. Common deductions include AHPRA fees, work related courses, conferences including transport, accommodation and food while you’re away from home for work purposes. Work uniforms, medical equipment (stethescope, stationary), overtime meal allowances and income protection paid for outside of superannuation are tax deductible.
The ATO website has a specific section on tax deductions for medical professionals.
It is vital you are always claiming unequivocally within the rules. You need a trustworthy accountant who will help maximize deductions without overstepping. Tax fraud seems to be one of the few things you can go to jail for in Australia!
Ensure you have a tax record keeping system that works, and make sure you record and claim every tax-deductible expense.
My Deductions should be ideal for this but I wouldn’t rely on it, after it deleted all my data last year. I use Samsung notes on my phone for portability and convenience. I can note expenses, then take and store photos of receipts.
Make sure whatever system is backed up in case you lose or break your phone or computer.
Salary sacrificing is probably the biggest way you can save on tax, paying only 15% on packaged salary. Read the full article on salary sacrificing here.
What to do with Your Tax Return
Most people celebrate a large tax return at the end of the financial year – it feels a bit like winning lotto. For interns starting out, this could be a great savings starter fund. Use it’s potential wisely instead of blowing it on consumerist waste.
If you have a solid money management in place, and especially if you have a principal place of residence (PPOR) mortgage and are in the highest tax bracket, consider varying your PAYG withholding
If you expect to recieve a $10,000 tax refund, pay 47% tac, vary your PAYG withholding. Instead of waiting to be refunded at the end of the tax year, pay $400 less tax per fortnight and avoid lending the ATO an interest free loan of $10,000.
If you automate the $400 in tax savings every fortnight into a 100% mortgage offset account, $200 in mortgage interest (assuming 4% interest) could be saved over the year. $200/hr is not a bad return on investment for time completing the application.
If the fortnightly savings are likely to vanish, you’re better off waiting for an end of year tax refund and using the lump sum to boost your savings be saved by the end of the tax year.
Timing when you earn ABN income, and when you pay tax deductible expenses can help you pay your mortgage off faster.
If you earn less than $70,000 as a sole trader using an ABN, you pay tax owed after the end of the tax year. This requires some control to not spend tax owed! If you earn $40,000 gross through ABN instead of payroll and are on the top tax bracket you will owe $18,800 at the end of the year.
If you put the tax owed as you earn it in an offset account against your mortgage at 4%, you will save $376 in mortgage interest over the year (in comparison with paying tax as you go).
If you happen to earn the $40000 over the first half of the tax year, and again save it in your offset, you could save $549 in mortgage interest.
Timing payment of tax deductible expenses at the end of the tax year will mean you receive a refund promptly, minimizing time your money is missing your savings or offset account.
Stop Sleep Spending!
Discretionary spending is non-essential spending. This is a big one. Many have no idea where their pay disappears. This is unconscious spending.
Spending without brain activation – swiping for this, that and everything that’s convenient and then not even remembering it. It’s almost sleep-spending! And most of us do it! Ever got a package in the mail you forgot you ordered?
The big benefit of setting a discretionary budget and having to stick to it is- you have to activate your brain when spending, or you run out of cash, and you’ll learn for next month.
Making money for discretionary spending a limited resource (esp for high income earners) forces you to assess the value of the purchase you’re considering. Do you really value that disappointing convenience food or is it worth putting a bit more effort in to preparing something tastier to take from home? Is there something you value more, a weekend away or luxury item that you would rather save your discretionary spend for?
Often, these decisions will seem trivial and the money saved not significant. But if you make a habit of turning on your brain when you’re about to make a purchase, and making a value decision each time, you are likely to find savings mount up quickly! The little things really do add up.
Remember, your pre-decided discretionary fund is for guilt free spending. Whatever you spend your discretionary money on is fine, as long as it makes you happy!
Annual Checklist to Optimise Finances
Save on Housing Costs
This is most people’s biggest cost. If you are able to reduce this cost and save the rest, you’re on the fast track to financial freedom.
If appropriate for you, consider shared accommodation for a few more years, or rent out a room in your home to help lower expenses.
When purchasing or renting a new home, carefully consider the amount you are willing to pay, and whether a more affordable home would work.
If you find yourself living in free hospital accommodation, make sure you maximize this amazing opportunity to save and/or invest the extra cash.
Save on Transport Costs
The hidden costs of car ownership can really slow your financial journey.
If you can rely on public transport, your feet or a bicycle consider doing this to save yourself thousands of dollars (the environment and the hassle of car maintenance).
When you need a car infrequently (getting home from late shifts at the hospital), investigate whether it would be cheaper to uber on those occasions.
If you do need a car, the wisest financial moves are based on damage limitation. Consider insurance costs and fuel efficiency as well as the initial outlay.
You can spend a lot of money trying to impress Dr Jones, but your new top model vehicle won’t be new or top model next year anyway. Consider second hand cars, to avoid losing money on massive depreciation in the first 5 years, but get an independent inspection to avoid buying a lemon if you can.
The cheapest way to own a car is to buy a great quality reliable 5+year old car and keep it for as long as it reliably runs.
If, like me, the fear of buying a lemon of a second hand car is too off-putting, buy a reasonably priced, great quality new car (ex-demo?). Resist all the extras designed to increase profit margins, and drive it for as close to forever as possible.
Save on Insurance
These costs seem to increase massively as the years go by!
Between income protection, car/boat/trailer insurance, house insurance, health insurance and professional indemnity, insurance is actually our household’s third biggest expense (after tax and housing).
You can save hundreds of dollars every year with no effect on your lifestyle by shopping around every time an insurance renewal comes through. Consider engaging an insurance broker to see if they can get you a better deal. Any professional associations you are a member of may offer doctor discounts, so worth checking this.
Save on Groceries
Are you throwing food away every week? This is terribly wasteful. Try meal planning, a repeated weekly or fortnightly plan makes life easier. Get creative with leftovers. Challenge yourself to use all the food you buy.
Consider reducing the amount of processed foods – the packaging has a negative environmental impact, it’s not good for your health, and it is relatively expensive.
Sign up for the supermarket points programmes. Maybe you can use these to save money on groceries at Christmas, or put them towards a flight in the future (the Lazy docs guide to points to follow)
Save on Utilities
These costs are getting more significant every year.
Try being conscious of your household energy consumption for a billing cycle. You may be surprised at how much of an impact turning off lights and power switches off at the wall has. It’s great for the environment too! If you have a cheaper overnight tariff, make it a routine to put the dishwasher on at night, and washing machine on a timer for early morning just before you get up.
Solar panels take several years to pay back the initial outlay, but if you’re planning on staying in your home for more than 7-10 years, worth looking in to. Another win for our environment!
Saves on Fees and Direct Debits
Have a look through your bank and credit card statements for any sneaky direct debits that you have forgotten about and no longer need. Cancel them stat!
Are you paying banking fees? If so, change to a fee free bank. ING and ME bank are recommended by the Barefoot investor as fee free and ATM fee free, no matter who’s machine you use. Opening an account is all online and pretty easy.
Set a reminder once a year, or when you are expecting your next pay rise. Review your savings and if they are not yet on target, increase them by 50% or more of your pay increase.
Work through this checklist to make sure waste is minimized, and that your spending is aligned with your values to maximize enjoyment.