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The SmartyPig Blog
June 30, 2009 • Posted by Samantha RobinsonMake Your Money Earn Its Keep
Time to start saving? Well here’s food for thought - do your sums right and there’s actually free money on offer. We’re talking about compound interest and it’s a phenomenon that can make your savings grow exponentially over the longer term yet requires little work on your behalf.
Whilst you might be able to teach an old dog new tricks, this is something you’re best to start working on sooner rather than later as you’ll be kicking yourself for not cottoning on to this lark sooner. And as if you needed further proof, Albert Einstein is said to have called it “the greatest mathematical discovery of all time“.
Let’s get the technical stuff out of the way first. What is compound interest? According to Wikipedia, “compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to the principal is called compounding (i.e., interest is compounded).” In other words, compound interest is what the Sydney Morning Herald calls one of the basic building blocks for saving money, investing and building a nest egg.
Compound interest is one of the most basic and powerful concepts to enhance your investment outcomes and help you reach your goal sooner. The Australian Women’s Weekly says that compounding means the value of your savings continues to grow as you earn increasing interest upon the increasing amount of money you have saved. Your money starts working for you to earn you more money, which will increase your choices and begin to set you up for financial security and independence.
James Carlisle at the Intelligent Investor believes if you give it a free rein, the power of compound interest can achieve amazing things. There’s not a lot you learn at school, says James, which has much relevance to investing. “Mostly it’s about developing a base of knowledge in any particular industry and then using some good old common sense-and these are things you pick up via books, chin-wagging down the pub and experience of the wide world rather than in any classroom. But there is one thing you should have learnt at school that’s vitally important to investing, and that’s compound interest.” Over at Financiallyfree.com.au there’s a view that if people were taught compound interest at school as part of a money management unit (rather than basic maths), then 95 per cent of retirees wouldn’t require the government pension for support as they do today. Guess that’s why our parents harped on for so long and so loudly about making regular savings.
A few tips from us when considering compound interest:
- Look for an account (or goal!) that calculates and pays interest as frequently as possible. For example, if you’re making contributions monthly, but interest is only calculated quarterly, your repayments won’t be considered until the next interest calculation so you may very well end up missing out on valuable boosts.
- Provided your interest is calculated often (as a shameless self-plug here, SmartyPig calculates interest daily), don’t wait until your next direct-deposit or the end of the month (or whenever) to contribute any additional money you have toward your savings. By adding these funds as soon as you can, you’ll put that money to work for you straight away.
- The effect of compound interest is more impressive the longer you have to let it work. For example, saving $10 a week for two years at 5% will see you with a total of $1092 in two years’ time ($52 of your total saved would come from interest). Save that $10 a week for your working life though (let’s say forty years) and you’ll have $64,603 (and over two thirds ($43,603) of that would be interest!).
But to really get to the heart of compound interest, you need to do your sums. There are literally thousands of compound interest calculators available online to do the hard work for you. As a starting point, check out the Australian Securities and Investments Commission (ASIC) calculator (this is the one we used to make the above calculations). Just key in how much money you have to start, how much you plan to save and per what period (weekly, fortnightly, monthly, etc.) and over how long, and enter the average interest rate is (for example, SmartyPig‘s current interest rate is 4 per cent per annum, without any value boosts from retailers taken into account) Then sit back and be absolutely amazed at what you might discover. Your only regret will be you didn’t do this sooner!
‘Til next time,
Team Smartypig
How To Set Goals
Do you believe in setting goals? We’ve just done a quick survey around the office (very scientific, colleagues passing our cubicle selected at random) and no surprises here, we all want something that we don’t currently have. Some are perhaps a little unrealistic (yes, Scarlett Johansson is probably unattainable but a bloke can still dream!), some require a commitment (hello New York!) and then there’s the big ticket items, you know the ones, the house, car, wedding, share portfolio, maybe even early retirement that only come about with true dedication to the cause. Question is, how do you get there?
If it’s like most things in life, there’s a pretty good chance that you’ll require money to make your goal come to life. And to do that you’ve probably got two options: win lotto (in case you’re currently factoring it into your plan, the odds of winning the big prize are around 1 in 45,379,620); or set a goal and work toward it yourself. Just imagine the personal satisfaction of getting what you want in life by making it happen on your own terms.
So here’s the good news. In case you didn’t already know it, saving is much easier if you have a goal in mind — and it stays there. Like most things, there a thousand theories out there on how best to do it, but here’s one we liked: the SMART principle. If you’re going to set a goal, make it Specific, Measurable, Attainable, Realistic and Timely.
So with that as our starting point, here are a few additional questions to ponder:
- What are you actually saving for? Narrow it down, picture it, and focus on what you have to do to get there. But try and make your goal realistic and achievable. If your heart is set on becoming one of the world’s first space tourists, make sure you’ve costed the journey out accordingly.
- Is reaching your goal time-bound? Like starting a diet, quitting smoking or writing your first novel, if you always plan to do it “tomorrow” or “someday”, that day will never come. Give yourself a date you want to achieve your goal by.
- How much do you need to save? Do your sums. How much money do you have already? How much do you hope to contribute over the time period you have set? Will you receive any interest on your savings? What will your financial institution do to help you on your way? (By way of shameless self-plug, SmartyPig pays interest on any money held toward a goal and when you meet your goal, SmartyPig retail partners will give you an extra boost by providing you with an added % on top of your savings if you take your funds as a gift card. These are retailers like David Jones and Blue Holidays!)
- What’s it going to take? Once you know how much you’re going to need to make your dreams come true, SmartyPig can help make it happen by calculating how much you’ll need to put aside each month and then direct debiting that amount from your everyday bank account. Saving via direct debit can be a great way to keep you on target as you’re far less likely to spend money you don’t have ready access to.
- How committed are you? Achieving any goal takes work, perseverance and sometimes, real strength to fight your impulses. So as you watch your savings grow, don’t give into temptation but stay focused on the bigger picture – your goal!
As you can see, it’s all pretty simple. So what are you waiting for? Time to set a goal and go for it!
Team SmartPig
Money Talks – why don’t we talk about our finances?
We were talking about an old episode of Sex and the City in the office the other day, and it got us thinking – in a society that’s crossed just about every boundary there is, why is money still one of those great taboos that we just don’t really talk about? Does Carrie Bradshaw ever have a financial goal, and more to the point, would she discuss it with her girlfriends? Well, in true Carrie-style, the answer is clear. There’s no need to waste valuable time talking about finances because: “I like my money right where I can see it… hanging in my closet.“ Score one point to the lady in the kooky dress and impossible heels.
Then of course, there are the rest of us who do have real lives, real jobs and real dreams to keep us going. A house, car or holiday – doesn’t really matter what your goal is, chances are you’ll probably have to put a plan in action to get there. So why are we all so afraid to talk about money with our family and friends? We know women seek counsel from friends and family on personal issues, yet they still don’t feel confident talking about the state of their financial health. According to a recent survey by ANZ, the overwhelming majority of Australian women say their money issues and concerns are off the conversation agenda. The research revealed 98 per cent of women are not comfortable when it comes to talking about long term financial goals and the plans they have in place to achieve them. What? Is this 2009 or 1959?
Blogger Anna Warwick agrees. “It’s been acutely painful for me to open up about [money] after a lifetime of pushing it to the back of my mind. In a perfect world, I would limit my utterings about finance to 'how much is that fabulous dress?’ and 'can I have the cheque please?’.”
So how do we have healthy ongoing communication about finances and our financial goals with partners, family and friends? We’ve sourced a few great tips that will have you well on your way to comfortable cash conversations.
- Examine your finances – take a close look at what you’re spending and saving, and what types of financial goals you have. If you know what you want and how long you want to take to get there, you’ll be in a better position to talk about money with others.
- Don’t embellish the truth – you’ve already done the hard part by making the decision to talk so be honest in your discussions. A few of us in the team have admitted to being surprised when friends have said “oh, me too!” when we’ve been honest about some horrific financial situations.
- Learn from others – chances are your family and friends have probably been there, done that too. And nothing brings people together better than a shared experience.
- Finally, take a tip from Magda. Talk openly about your goal and you might be astounded at the support you’ll receive. The good news is you don’t have to front a national advertising campaign, just try adding the SmartyPig widget to your MySpace or Facebook page. Like getting your friends and family to support you on your quest to quit smoking or lose weight, they can be the difference between success and failure when it comes to achieving financial goals too!
Whichever way you look at it, a little communication sure does go a long way. So enjoy the talk!
Team SmartyPig.
Is Lay-by Back In Fashion?
Greetings shoppers and welcome to the question of the moment: whatever happened to lay-by? Don’t know? Hmm, neither do we. One day it was there, then before you could say 'easy credit’, it was gone. Replaced by a tidal wave of credit and store cards, all designed to capitalise on our impulse to shop…and to shop impulsively. Let’s face it, we live in a culture driven by instant gratification so this outdated notion of making a decision, placing a deposit and paying off your purchase over weeks or months just doesn’t seem to make sense, does it?
Outdated and old-fashioned maybe, but thanks to the global economic crisis and a growing aversion to credit card debt, it seems there could be a place for lay-by after all. In tough economic times, many of us are re-evaluating our spending habits and lay-by is beginning to look like a pretty attractive option. No wonder the Financial Times calls it the “lost art of putting things to one side“. And it seems the idea is catching on. In the US, this relic of 1950s retailing genius, is definitely on the increase while in Australia, Layby Services Australia chief executive Terry Seremetis, estimates the market is worth $2 billion annually and growing. Why? “There is a goal to aim for and a reward at the end — unlike credit cards and loans, it avoids the risk of getting into debt.”
Terry, you make a fine point. At its most basic, lay-by is about setting a goal (I want those shoes!), securing your goal (here’s my deposit), working out a payment plan (I’ll pay you money every week, so please reserve my shoes for me) until finally, you reach your reward (hellooooo Jimmy Choo!).
So here’s a crazy thought: maybe the principle of lay-by could be applied to achieving goals outside the department store. What if you had a goal (holiday, jewellery, a car) but just needed some help to stay on track. Sounding familiar? Could SmartyPig be today’s answer to lay-by?.
So next time you’ve got your heart set on something that may be beyond your financial means, weigh up your options. You could go for the instant gratification you get when you swipe your plastic or take a cue from your mum and (if the option is there) consider giving lay-by a go (but please read the fine print first). Alternately, think pink and take a look at a SmartyPig goal… you get rewarded with interest and perhaps a value boost from your retailer of choice!
'Til next time, happy shopping.
Team SmartyPig
How To Make That Holiday Happen
Winter blues getting you down? It’s grey, it’s cold and summer seems a long and distant memory. So maybe now is the perfect time to start thinking about your next holiday (particularly if you live in Victoria and are now suffering the public holiday drought that occurs between the June long weekend and Melbourne Cup day).
Will it be sunny Queensland? Exotic Asia? Or will you tread a well-worn path to the UK and Europe? Regardless as to your destination or budget, reaching that end goal can be a challenge. So we’ve done the hard work for you and worked out some of the best tips around that will have you taking holiday happy snaps before you can say ‘bon voyage!
Without further ado (drumroll please) our tips to get you out of your rut and living lavida loca on your holiday:
- First things first, you need a goal. Unless you’ve got the resources of Paris Hilton, chances are you need to plan your holiday in advance. This is the fun part though, because you get to do all the dreaming in the world – working out what your perfect trip will cost you means that you’re halfway there. Knowing what you’re working toward will help you stay on target and give you something to look forward to. So, if you have champagne tastes but are currently on a beer budget, it’s time to focus on the things that matter.
- Once you’ve worked out how much your getaway is going to set you back, calculate how much you need to put aside each month to make it happen. By entering your target date and $ amount you need to achieve your goal, SmartyPig will automatically calculate how much you need to put aside each month. Consider setting up separate goals for each part of your trip too. Small goals can be reached sooner and will keep you focused. For example, set up four goals – one for your airfares, one for accommodation, one for spending money and a fourth for a holiday wardrobe!
- Share your plans with friends and family. SmartyPig can help you here – when you set up a goal you have the option to notify friends and family by email. You can also add your savings goal to almost any website like Facebook or your blog through which people can contribute and you can show how close you are to your goal! Sharing your goals on the fridge is fine strategy too though.
If your grandmother insists on giving you money for your birthday, fantastic! Not only does it make Gran’s life easier (because she doesn’t have to think about a present), but it’s also a huge bonus for you! A quick whip around the team says that in most cases, parents and grandparents like the idea they’re helping you save for something too.
- With the advent of the internet (it’s this new craze, all the kids are using it), there’s no excuse for not getting the best deal around when it’s so easy to compare and save. Check out great sites like wotif or lastminute, especially for accommodation and car hire. Travel guides (Lonely Planet, Rough Guides) are a fabulous source of information on everything you can do and see in your city or country of choice, offering great reviews on all levels of accommodation – from the budget to 5-star – and options on how to get to and from your destination. Don’t forget that Blue Holidays is one of SmartyPig’s retail partners too. Cash out your SmartyPig travel goal as a Blue Holidays gift card, and you’ll get a fabulous 4%* on top of the money you’ve put aside (in addition to the interest paid!).
- Ask around and find someone who can give you the rundown on planning a trip. We’ve all got mates who’ve been there, done that. Find out how they did it, how long they saved for, where they stayed. And, like Gran, they may all decide to chip in for your birthday or other special occasion and help you reach your goal sooner. (By the way, if you’re going to New York, head to Dumpling House for the best and cheapest chinese food).
- Do your research too – if you’re traveling on a budget, find out if you’re eligible for any discounts. It is a little known, but highly useful fact that just because you’re not a student doesn’t mean you can’t get student-type discounts. STA Travel sell a variety of internationally-recognised cards such as a youth card (under 25s) and a teacher card.
- Learn to innovate, be practical and maybe even compromise. If your airline charges for you to check in luggage, take on the challenge and see if you can do the trip with carry-on alone. Can you afford to fly first-class or stay in the world’s most expensive hotel? (Note: apparently, for a surcharge, they will actually fill a bath with champagne… good to know.) If the answer is a resounding ‘no’, then maybe it’s time to scale back your grandiose dreams and travel like the rest of us. Sure, cattle class is tough going, especially on a long haul flight, but it’s soon forgotten once you take your first step in a new land. Travel + Leisure magazine’s Jane Parbury has also sought out some top tips to help you save money on your next trip.
Finally, always keep an eye on your end goal. Picture yourself walking the streets of Paris, catching a show on Broadway, backpacking through Asia or on safari in Africa. One of the members of our team is currently planning a trip to South America so we’re all participating in “Spanish word of the day”. It’s a great way to keep focused and ensure you last the distance.
‘Til next time, happy travels!
Team SmartyPig
* This % is accurate as of today, but is subject to change. Please be sure to check the actual percentage being offered at the time you finish your goal. The % is provided along with your money saved and any interest paid in the form of a gift card with the retail partner you choose.
Teaching Kids About Money
Everyone has a view on how to teach kids to save, which can often be hard to pair against just wanting the best for them. Robert Kiyosaki’s ‘Rich Dad Poor Dad’ illustrated to the masses that different parents have different ways of going about this life lesson, but whether you want them to be a property mogul or just clued up enough to make good financial decisions by the time they leave home, the internet can be the source of some great info for teaching kids how to save and achieve their goals.
- Teach them about money. Understanding Money is packed with great information and tips. Check out the Information Sheet on Teaching Your Kids About Money and take heed of its mantra, “Start early and lead by example”. Kids need to understand where money comes from so when you withdraw money from an automatic teller machine or use EFTPOS at the supermarket, explain that it’s your money coming out of your bank account.
- Give your kids regular pocket money. According to financial expert Adrian Raferty, pocket money is the first step to learning to manage finances. If kids have an income, it allows them to practise spending, saving and budgeting. When they’re older and have a part time job, consider having them contribute a portion of their wages toward household expenses (even if you just put the money aside for when they move out). This gets them real-world practice balancing expenses with disposable income.
- Encourage kids to set a goal (the latest Lego? a new bike? clothes? a car?) and start saving. Whether it’s 50 cents or $50, it’s never too little or too late. SmartyPig can be a great way to learn about saving for goals, as with our compound interest and value boost from top retailers, it’s the piggy bank for a new generation!
- Do your research. There are some great tools out there designed specifically to teach kids about money and how to save. To make it easier, Money Magazine reviews some of the best and finds getting kids to work for their pocket money is an invaluable lesson to learn early in life.
- Consider communicating your savings goals with your kids too – having each member of the family’s savings goal on the fridge, for example, can be a great way to support each other and help kids to learn about priorities for money and rationing disposable income.
Above all though, remember the saying – ‘from little things, big things grow’.
‘Til next time – happy goal setting!
Team SmartyPig
