Financial adviser’s $118 trick to become a millionaire by retirement

Money may feel tight right now but there’s one way to turn $118 into over $2 million – you just need to follow some simple advice.

In today’s cost of living crisis, making ends meet is hard enough – not to mention trying to find the money to actually save and invest for the future.

The average saving rate in Australia is currently 3.2 per cent, which means that on the average income of $95,576 you’d be saving $59 per week.

This compares to our peak savings rate of 23.6 per cent just a few years ago. And yes the world does seem different now, but finding a way to boost your savings by even a small amount will have a huge impact. Consider this example.

If you’re 20 today, by saving at double the current average saving rate and investing the money into the sharemarket, your money would grow by an additional $2,064,436 by age 65 compared to someone saving at the average rate. It’s worth working for.

Saving isn’t easy, but there are some hacks you can use to make it easier to squeeze more savings out of your current income.

The reality is, there are only so many types of expenses you have; fixed costs, i.e. your rent and bills, spending, your pocket money to cover food and entertainment. Plus, day-to-day discretionary spending, debt, covering mortgage payments and/or personal debt, lifestyle and bigger ticket discretionary spending.

In each of these categories there are a few common mistakes people make, as well as tricks you can use to cut out expenses and boost your regular savings number.

Fixed expenses

These are your rent, bills, and the boring stuff. They’re easy to predict and easy to automate, and ultimately just need to get paid.

The key to doubling your savings rate is to take a good, hard look at your finances.

There are two ways you can reduce your fixed costs; cutting out spending, and shopping your expenses around.

It’s estimated 17 per cent of Aussies have forgotten to cancel unused subscriptions which can cost hundreds each year – staying on top of these and eliminating fixed costs you don’t want or need will move the dial on your savings.

Secondly, there are a number of fixed costs that you can save money by comparing around, like insurances and utilities. When every dollar counts, a small amount of time invested here regularly will be valuable to make sure you’re getting the sharpest deals and not spending more than you need to.

Spending

This is your main day to day discretionary spending, and it’s the category that’s most commonly responsible for blowing your budget and stalling savings.

In addition to entertainment and clothes, this category includes all your spending on food and medical costs, two areas that are necessary to live. It’s easy to spend a lot here, but if you plan well you can keep your costs low in this area, and it will go a long way to pumping up your savings number.

How much money you allocate to this category is going to be a big driver of your day-to-day lifestyle, and make sure anything that’s important is included – then ruthlessly cut out the rest so you can save more.

Being clear on how much you’re allocating to your spending and then having a separate bank account where this amount of money is deposited each week goes a long way to giving you a clear guardrails for your spending to ultimately hit your savings targets.

Debt

This one is everyone’s least favourite category, but an important one to take care of – there’s also a big opportunity for savings here.

If you’ve got bad debt, it drains your cashflow and savings capacity. Trying to get ahead with your money while running bad debt is like working with a leaky bucket.

Even though it’s painful, it’s essential to tackle debt first.

A key step on your journey to saving success is to eliminate bad debt from your life, this will cut out dead interest costs and the ‘cashflow’ cost of a repayment. If you have a bit of debt it can take some time and work, but getting there is the only way to get to where you really want to be.

With good debts, you should make sure you’re comparing providers regularly to cut interest costs. The market for mortgages is highly competitive and it’s easy to save a heap by shopping around.

Lifestyle expenses

This category is for your bigger ticket, discretionary expenses like travel, new tech gear, things for your house, and other less frequent spending like gifts. The spending you do in this category is likely to be the things that bring you the most enjoyment, so it’s an important one to include in your spending plan to make it sustainable long term.

But lifestyle is also an area you can cut back on short term if needed to make your other spending and savings goals work. Planning this spending consciously ahead of time will also mean you spend less.

Unexpected expenses

Unexpected expenses are the main reason most people say they can’t stick to their savings goals, so some focus here is necessary to make your savings work. As part of your allocation to lifestyle spending you should also include an allowance for unexpected expenses like having to replace your phone or fixing something around the house.

If you don’t include an allowance for these unexpected costs, when they happen (and they will), it will throw out your spending and saving plan and leave you scrambling. Include something here and if it isn’t needed you can always reallocate the money somewhere else.

The wrap

With high interest rates, the rental crisis, inflation crisis, and petrol going through the roof it’s easy to give up on savings. But if you do, it means no progress actually getting ahead, and it often takes much longer than you think until you feel ‘ready’ to save again.

Not saving creates an opportunity cost, not just from the amount of money you don’t save this week, month, or year – but instead how much money that would grow into over the decades ahead – the cost is often much more than you think, which is why it’s so important to find a way to save today.

Ben Nash is a finance expert commentator, financial adviser and founder of Pivot Wealth. Ben is the creator of the Smart Money Accelerator program that helps people build a second income investing faster.

Ben is also the Author of the brand new book, ‘Replace your salary by Investing’ and the host of the Mo Money podcast, and runs regular free online money education events, you can check out all the details and book your place here

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.