Despite current low interest rates, Australians are saving more than at any point since the 1980s. A recent survey revealed the average Australian is putting away $427 per month1 – or 12.7% of their disposable income. While economists and the Reserve Bank of Australia might prefer we stimulate the economy by spending more, it seems we’re being a little more cautious in the aftermath of the financial crisis, and now COVID-19.
But is that level of saving enough, given household debt is also at near record levels? And how do you measure up against your peers when it comes to saving for a specific goal and saving for a rainy day?
The average rate of saving varies widely, depending on your age, wealth and income. Several research reports, including a Financial Fitness Survey conducted by Newgate Research, have found Millennials (those aged 20 to 34) are our nation’s best savers – putting aside an average of $500 per month compared with $400 for Generation X and $300 for Baby Boomers2.
Saving for a home deposit is likely to be their major goal – although other surveys have found travel and social experiences are also important motivations3.
Generation X, squeezed by home loan repayments and the cost of raising a family, may have less disposable income to put aside. But given their financial commitments, they’re also most in need of an emergency fund.
Meanwhile, if you live in a capital city you’re likely to be saving more than your friends in regional areas ($478 per month vs $325 per month). If you own shares, you’ll also save 13% more of your income (probably due to your higher average income)4.
These figures include saving for specific goals, like a wedding, home deposit, holiday or an education fund. But what about our ability to manage an unexpected financial shock? Life can be unexpected, but the bills keep rolling in even if you have a medical emergency, lose your job or need to take time off work to care for a family member.
Even an unusually high bill – like a problem with your car, emergency dental work or repairing the house after a freak hailstorm – could seriously disrupt cash flow.
When the Financial Fitness survey asked Australian workers how long they could manage if they suddenly lost their income, one in 10 said they would immediately go into debt. 53% could cover expenses for three months or less, and 36% could easily access less than $1,0002.
This is in line with ASIC’s Australian Financial Attitudes and Behaviour Tracker: while four in five Australians are saving, 7% would not be able to cover three months’ living expenses if faced with a sudden loss of income5.
On average, we clearly need a bigger rainy day fund. Best practice guidelines suggest the 3-6-9 rule6:
- 3 months of take home pay if you’re renting, have a steady job and no children
- 6 months of take home pay (for the highest earner) if you have a home loan and/or children at home
- 9 months of take home pay if you are self-employed, or have irregular income.
If in doubt, six months is a good benchmark to aim for. Even if life goes smoothly, you’ll appreciate the financial freedom and flexibility it provides.
With the average household debt in Australia now four times the levels in 1988, a solid emergency fund means peace of mind. For households headed by 30 to 50 year olds, debt to income is now 209%, up from 149% in 2006 – and home mortgages represent 63% of that amount. Rock solid savings give you a buffer if interest rates do happen to go up again7.
What’s more, 25% of Australians currently experience financial stress from paying bills, raising emergency money or having to ask friends for financial assistance7. With an emergency fund, that won’t keep you awake at night.
Online high interest savings accounts make it easy to automatically save money from your salary every month. It’s worth shopping around for a good introductory interest rate, given current returns are low. Every extra dollar earned, even for just four or six months, will benefit from compounding.
And if you’re one of the 15% of Australians saving nothing at all, don’t despair. It’s never too late to begin – and at least you now know what to aim for, based on your age, income and goals.
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