Personal Budgeting and Personal Savings is not a new idea. I learnt about this when I was very young. I was given a money tin to put some of my pocket money in it. I believe that we have been exposed to this concept in some way or another. However everyone has a different view point in how important this concept should be.
It is only human for us to spend but with the ease of obtaining credit cards we could get ourselves into a lot of financial trouble. We are a spending nation and we love to shop. We shop because we need things like food, shelter and clothing; we also shop because we want things like play station, Wii, bigger car, bigger house, electronic gadgets, jewellery etc. However, are we shopping for appreciable assets like properties, shares and collectible items like art and antiques?
So why is savings so important? We save so that should the need arises; we can use our savings at a later date. The older we get, the more we will think about lifestyle in retirement years. With writers like Robert Kiyosaki, we are seeing younger people getting out of the "rat race". Mr Kiyosaki speaks about investing well and building businesses that will provide you with positive or passive income. However with most of us, we will have to start with an active income, IE our jobs. Once we have saved sufficient sums of cash, we can then invest our money to either buy or invest in a business or shares which in turn should give us passive income. The keyword here is should. I do not have crystal ball and therefore I cannot predict what will happen next year let alone tomorrow.
Why is this viewpoint important? This is important because we currently live in an economy with relatively low interest rate. We have a job (assuming that we are employed) and we pay our bills. What happens if we took the path of buying properties with debt, some might even call it good debt, or buy shares and borrow against it? If there is a small change in the interest rate, depending on the amount borrowed, the increase in accrued interest rate payable to the lender could be substantial. Let’s take a small example of a 30 year home loan of $400,000 at 5% interest rate per annum. Interest is calculated on a daily balance and charged at the end of the month. The monthly repayment to ensure the loan is amortised over 30 years would be $2,147.29. If the interest rate were to rise by 0.25% the repayment will increase to $2,208.81, that’s a $61.52 increase per month. Now let’s project a 1.00% rate rise. This will increase the monthly repayment to $2,398.20 or $250.91 per month extra that we will have to pay for the privilege of owning a home with a mortgage.
Again assuming that we are still working, our wages will not increase at the same rate as that of the reserve bank. Therefore with any increase in the official interest rate, if we had budgeted for this, we should be well prepared. However, those who are not ready for this increase, may have to find a second job to make ends meet.
The key to this is budget within our means and not outside our means. Spend within our means. Do not spend more than we earn and do not spend on things that we do not have the funds for. It is easy to say that I will get paid tomorrow or there will be a tax refund cheque coming. What is important is that it is not in your hands at this moment.
Savings is an important key. If our capacity is only to save 10% of our income, then so be it. If we cannot save 10% of our income, then try a smaller amount such that you will not feel it and progressively move to a higher amount. Remember, savings is a discipline, however once you get the hang of it; it will be with you for life.
