Advice on how to save for a new starter?

[nick69]

Hi Mustachians,

I wasn't sure whether to put this in the "Welcome and general discussion" section or as a "Throw Down the Gauntlet" area but I assume the mod's will move it if necessary. :)

I found MMM the other day so I thought I'd join up and see if I can kick start my finances with some help from this site and it's members.  Basically I've been working FT for a couple years now and have been living from pay to pay with little thought on long terms savings or finances beyond staying out of debt as best I can.  This isn't where I want to be financially so something had to change pretty dramatically.   So I've decided to start saving about 40% of my income or about $400 a week so that I can save $20k over the next year.

My questions for the Mustachians is that given my situation outlined below:

• Is there anything financially that I should be aware before I begin this task? 
• Should I be paying off my Student debt first any worrying about saving later? 
• Once I have some savings what are some ways I can stop my self from spending it before I've invested it properly? 
• What are some investment strategies that would work best for maximising the return on a $20k investment ?

My situation fight now:
Location: Australia
Age: 27
Debt: ~20k student HECS debt (afaik 0% interest and paid off through my taxes?)
- Currently renting so no mortgage.
- Credit card debt is paid off monthly so currently at $0
Investments: ~$5000 in various ASX stocks and precious metals.
Super: ~$50k
Savings: ~$500

Financial goals:
Short term: Save and or invest $20k (about $40% of my income) in the next year.
Long term: Retire by the time I'm 55.

Cheers,
Nick, 

[BBub]

Hi Nick - congrats on the decision to begin this journey!  Should probably be in the "ask a mustachian" section, but whatever.  The topics are around here are reasonably flexible, so don't fret it - the most important thing is that you decided to post!

1. One thing financially you may want to consider is an emergency fund.  Some people keep about 3 months spending in cash, others keep 6-8 months, and some people don't believe in having one at all - instead opting to use 'springy debt' and monthly cash flow to cover unexpected expenses.  Either way, consider whether you need an E-fund and think about a number you'd be comfortable with - there's not really a right or wrong answer.  Factors worth mulling over include whether you own vs rent, have kids, job security, risk tolerance... things like that.

2. I think most around here would agree that you should keep the 0% debt for now and save/invest the money instead.  Your call though.  In the big scheme, $20k is a small drop in the bucket if you really adopt this FI mindset.

3. The most popular method is to pay yourself first.  On payday, transfer money to investments immediately then use the remainder to take care of living expenses.  Although, once you get used to investing for a little while saving will become more meaningful than frivolous spending.  If the FI thing really "clicks" this problem will eventually just go away & you'll begin to spend based on your own values then automatically invest the giant surplus every month.

4. Decide on one and stick with it.  Most around here advocate index investing with a heavy equity allocation.  Once you make your decision, write out an investment policy statement.  Doesn't have to be anything really fancy - just a one pager with your target allocation, rebalancing discipline, etc.

One other comment - the 55 number is way too conservative IMO.  Even if you don't retire, you may want to consider significantly increasing your FI goal.  55 is almost 30yrs away for you.  Anyway, I think once you get in the swing of things you'll see that FI can happen way, way sooner for you.

Good luck and welcome!  Glad you are here.

[Sibley]

Nick, welcome. Seconded on what BBub says.

The tools you use to accomplish this lifesyle, to whatever degree, start with being aware of your expenses. If you're spending $500 a month on coffee and don't realize it, then you can't change it. Start keeping detailed records of your expenses - every penny (or whatever it's called there - I'm USA). Figure out where the money is going, then review it and see if you're ok with it. If you're not, then figure out how to change things. Small changes can really add up too, so optimizing things like phones, insurance, etc can make a huge difference.

[nick69]

Cheers, BBub and Sibley,

1) I think I'll do both; I'll get started on an emergency fund and keep my CC to use as springy debt.  I currently have all my bills direct debit out of the CC so if a big bill comes through I'll need some cash somewhere to top it up quickly to avoid interest payments.

2) My student debt is interest free and paid automatically pre-tax out of my salary so if it bothers me further down the track I'll pay it off with savings.

3) I've opened up a high interest savings account to store the bulk of my short term savings, it's configured to require minimum deposits per month and to penalise my interest rate if I make withdrawals,  Hopefully this should curb any desire to spend the $$ until this FI mindset "clicks" (if it ever does).   I've also gotten a pocketbook app which can detail my spending and allows for me to set reminders on spending limits.  I'm not sure how effective it is but time will tell I guess.  So far most of my spending $$ seems to go on coffee, eating out and buying books on my Kindle (those $3 books seem to add up faster than I'd realised).

4) I've dabbled with stocks before but I think I'll wait until I have more financial experience and a bit more cash behind me before I dive any deeper.  In the past I've gone through a broker but considering the fee's involved I might need to look elsewhere.

And 55 was always meant to be a conservative FI estimate. If this Mustachian lifestyle works I'll revise it.

[marty998]

Hi Nick

Your student loan is not interest free. It is indexed at inflation on 1 June each year. Best moment to make a repayment is 31 May.

It is also not paid automatically out of your pre tax earnings (i.e. it doesn't reduce your gross income). It it repaid by deducting extra tax from your gross. The actual repayment (credit against your loan) only happens when you lodge your tax return. Until then the ATO holds your money in suspense.

$400 a week is a great effort in terms of saving. If I were in your situation I'd just pop $5000 every 3 months into the VAS ETF and set and forget.

[happy]

HECS debt is not generally considered "hair on fire" debt, its largely up to you whether you want that nice "free of all debt feeling" if you pay it down fast. Otherwise the system will ensure you pay it back at a relatively low interest rate.

When I first started saving I made sure that all savings were automatically removed from my spending account every payday. In my case my operating account was a cheque account, so I only "saw" what was in there.  If I build up a bit of balance, I was likely to be tempted, so I really tried to have only enough in there to live and pay bills.  I also needed a slight sense that money was a bit tight, which historically was enough to stop me from spending.  After changing all my habits, I no longer need to do this…I can have excess in that account and not be tempted to spend it.

As far as being tempted to spend your stash:
1. don't start fantasising about what it could buy ( e.g. nice car, holiday whatever floats your boat) - don't even start to think about it
2. Think about how hard its been to save it - you don't want to have to save it over again
3. The hardest part is the early saving, since with compounding it gets easier - again you don't want to have to do it all again
4. Think how you are saving for your future self - you are saving now to spend later.
5. Put it somewhere that is hard to get at e.g. invest it.
6. You have to believe it will work - it will, if you stick to it.  Its easy to say " its too hard, it'll never work" and give up.

[nick69]

HECS debt is not generally considered "hair on fire" debt, its largely up to you whether you want that nice "free of all debt feeling" if you pay it down fast. Otherwise the system will ensure you pay it back at a relatively low interest rate.

When I first started saving I made sure that all savings were automatically removed from my spending account every payday. In my case my operating account was a cheque account, so I only "saw" what was in there.  If I build up a bit of balance, I was likely to be tempted, so I really tried to have only enough in there to live and pay bills.  I also needed a slight sense that money was a bit tight, which historically was enough to stop me from spending.  After changing all my habits, I no longer need to do this…I can have excess in that account and not be tempted to spend it.

As far as being tempted to spend your stash:
1. don't start fantasising about what it could buy ( e.g. nice car, holiday whatever floats your boat) - don't even start to think about it
2. Think about how hard its been to save it - you don't want to have to save it over again
3. The hardest part is the early saving, since with compounding it gets easier - again you don't want to have to do it all again
4. Think how you are saving for your future self - you are saving now to spend later.
5. Put it somewhere that is hard to get at e.g. invest it.
6. You have to believe it will work - it will, if you stick to it.  Its easy to say " its too hard, it'll never work" and give up.

Cheers

Yeah not too worried about the HECS debt,  unless they change the policy and i suddenly owe a higher interest rate on it.

And yep already have the automatic transfer setup, was payday today and i just saw the 1st transaction go through :)

And that's a good advice on how to not spend, i'm going to save a few months worth and then look into investments,  i will probably stay away from property for now and see what else is around as property will just take far too much of my income/savings to get into.

[CletusMcGee]

You shouldn't need to save for a new starter, generally you can just replace the solenoid and those are dirt cheap.

[Bob W]

Nick69 --- You should consider putting up a "case study."  There are directions on one of the threads.  Just search  "How to do a case study."

We could totally shake you up and make you rich if you share more information. 

[Gone Fishing]

Might be some useful information here:

http://forum.mrmoneymustache.com/taxes/early-retirement-australian-style/

[BBub]

We could totally shake you up and make you rich if you share more information.

LOL, +1. 

Bob W I really enjoy your posts.  Just want to throw that out there.

[nick69]

Nick69 --- You should consider putting up a "case study."  There are directions on one of the threads.  Just search  "How to do a case study."

We could totally shake you up and make you rich if you share more information.

Willing to do it but should i start a new thread under "ask a Mustachian" or just continue this?

[happy]

Suggest: Read " how to post a case study"….and try to follow the directions. If you don't put all the info in, your fellow mustachians waste a lot of time  and  have to ask more questions to try to figure it all out.

Put Case study and Australia into the thread title. Advice for Aussies can be different to  Americans, and most of us scan for threads with Aussie or similar in the title.

Post under "Ask a mustachian" but you could put a link back into this thread, if you wish.

Not everyone wants to disclose all their financials on the internet so if you decide its too intrusive thats OK, you can just keep posting on this thread, or start looking for all the Aussie threads like the Australian investing thread. Its not compulsory to post a Case study. If you're not prepared to give all the financial details, don't put up the case study, since this will waste everyones time.