Financial Counselling Australia’s ‘Everyone Needs A Savings Buffer’ Consultation Paper offers the following example:
‘When asked how they would cover an unexpected large expense, around one-quarter of Australian adults surveyed by ASIC said they would use a credit card, store card or overdraft.1 Similarly, the ABS General Social Survey found that 13% of the population would be unable to raise $2,000 within a week for something important and 19% of the population had at least one cash flow problem in the last 12 months (such as being unable to pay an electricity, gas or telephone bill on time).’
A SAVINGS BUFFER BUILDS RESILIENCE
When you face unexpected costs throughout their lives, a savings buffer enables you to manage these challenges without having to rely upon credit or other financial support. Having a savings buffer is a key element in building financial resilience within your household, and in enables consumers to take control of their finances.
Without such a buffer, you put yourself and your family at higher risk of financial stress and hardship. If you or your family is carrying high amounts of debt (house, car, credit cards), then small shocks can create a downward spiral that it is challenging to recover from. These situations present the real risk of you finding yourself in a financially precarious situation even as you are taking steps to manage and repay debt. Without a savings buffer, unexpected costs can result in ongoing vulnerability, financial stress and occasionally, poverty.
CREATING A SAVINGS BUFFER ENCOURAGES A SAVINGS HABIT
It surprisingly difficult for people without a savings history to become regular savers, and those with problem debt may find it especially difficult to save. However, the value to individuals and families of having a savings buffer, means that learning to put aside even small amounts on a regular basis is worth supporting in a structural way.
Behavioural insight research indicates that consumers are often affected by 'present bias,' where decisions are made and actions taken based on current circumstances and perceived immediate rewards, rather than looking to the future impact of current decisions.
According to Financial Counselling Australia, consumers affected by present bias will subsequently downgrade the value of a reward they perceive as being a long way off (hyperbolic discounting). This discounting can act against making longer-term commitments and can be observed in some attitudes towards savings, where they can tend to disproportionately value spending money in the short-term, rather than putting it aside for a rainy day or longer-term goal. This particularly applies towards repaying debt.
THE CORRELATION BETWEEN FINANCIAL LITERACY AND SAVINGS
The National Financial Literacy Strategy and Research, ANZ’s most recent survey of financial literacy, measured the levels of financial literacy in the general population. Findings indicate that groups with lower levels of financial literacy include people on low incomes or those with less than $2,000 in savings and investments.
Therefore, building a savings habit is likely to have flow-on effects that have the capacity to increase your financial literacy. The key impacts that a savings habit (and a savings buffer) have on savers, include increased confidence in dealing with personal finances and consequentially, greater confidence in dealing with financial products – thereby improving levels of financial inclusion and engagement.
Behavioural insight research also reinforces the beneficial impact of creating good financial habits, such as regular saving. Once a consumer has set up the regular savings arrangement, research tells us that this leads to the formation of good savings habits which can continue long after the arrangement has ended.
HAVE A SEPARATE ACCOUNT TO HOLD YOUR SAVINGS AND PAY YOURSELF FIRST
Ideally, any savings should be held in a separate account to the your everyday account. In addition, paying yourself first refers to making regular deposits into your own savings and investment accounts first. For example:
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Pay off your debts and don't incur any new ones, except for a mortgage or reasonable business/real estate loans.
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Pay into your superannuation fund.
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Make deposits into your emergency fund.
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Buy reasonable levels of insurance, including life insurance and long-term disability care.
A good rule of thumb is that you ‘pay yourself’ minimum of 10% of your income into a savings account regularly. Do it every time you are paid if possible. Work towards having approximately 3 month’s worth of a buffer in the bank to cover all your financial commitments, so that if the worst happens, your expenses are covered. Also, think about what your personal debt to equity ratio is; how much debt are you carrying and how much equity can you apply against that debt if needed? Ultimately, building a good savings habit builds resilience, and is inherently empowering. A savings habit builds financial capability and literacy and serves to give you choices in those moments when life throws you a curve ball.
If you are inspired and would like to join the revolutionary movement that Imalia is creating, you can request to join our Facebook group The Wolfpack, to share ideas and learn from other like-minded women.
1 ABS, 4159.0 General Social Survey: Summary Results, Australia 2014 (released 29/6/2015).