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Here’s the key to getting ahead with money: being able to save regularly from every pay. Setting aside money for your future instead of immediately spending it all is absolutely fundamental.
No savings, no growth. But sometimes that’s easier to say than do (and keep doing).
When you’re saving, you’re spending less than you earn – which is so important – and the more you save, the more options you’ll have. This may be the most essential guide we have on Sorted, so read on.
If you think of all the great things we recommend you do to sort your money, none of them are really possible unless you can save some of the money you have coming in. For instance, a steady savings habit lets you build an emergency fund, invest in KiwiSaver, shed your debt, pay for insurance, eventually even buy your home.
Having pūtea penapena frees us up mentally to make better decisions. When it’s hard to make ends meet, not having a buffer is like trying to function effectively without a night’s sleep! Studies show that without savings, we’re more likely to worry about money, be more impulsive, give in to temptations, muddle our thinking and risk getting into money troubles.
Most importantly, saving powers you towards reaching your goals – many of which take money – so you can achieve what’s most important to you in life. More on that below.
Since everyone’s needs tend to grow over time, until eventually we step back from working entirely, we all need to stash cash so it can grow. Think of your money like sunflower seeds – eat a lot now if you like, but make sure to set some aside to grow flowers, so there will be many more seeds in the future.
If you really want savings, the best way is to ‘pay yourself first’. But what does that even mean?
Many times we try to save after taking care of our bills, our needs, our wants and the unexpected expenses that pop up, only to find that there’s never much left over to put away.
Sure, we may have managed to pay for everything, but haven’t got much to show for it in the long run, and we can’t grow our money for the whāinga that matter most to us.
Without paying yourself first, you may find that some of the expenses you’ve set up are holding you back from saving as much as you could. There might be subscriptions you aren’t really getting a lot out of, or utilities you are paying too much for because you haven’t researched the alternatives.
So each time you’re paid, get into the habit of paying yourself first – squirrel some away before it gets spent.
Paying yourself first is the most effective way to save your money. Send a chunk of money to your savings straight away – before you pay everyone else.
Now obviously you can’t just pull any random dollar amount out of a hat to pay yourself first and ignore all your other expenses! There are bills to pay after all.
You can certainly start small at first. After all, even small amounts can make a big difference over time and get you ahead.
But to work out the most you can pay yourself first, you need a plan. That’s what a pūtea essentially is: a plan for your spending and saving – for flowing your money towards where you want it to go.
As you plug your incomings and outgoings into your budget, you can tweak it so it maximises your extra money (your surplus). Keep what makes you happy, then trim to find some savings here and there.
When you do, you’ll know how much you can save from every pay. Here’s our budgeting tool to get started.
Paying yourself first works best when it’s a regular habit, and there’s no better way to make sure saving happens than setting it up to be automatic. It takes all of 10 minutes to schedule an automatic payment in your online banking for each time your pay rolls in.
It’s also really important to have your savings in a separate account, possibly one that you don’t even see too regularly. Maybe even with a different bank, so that it’s out of sight, out of mind.
Generally you’ll want to choose the type of account that will earn the highest moni hua and charge the lowest fees. Some savings accounts require you to keep a certain amount of money in them, and some have set-up costs. Others might cut your interest if you withdraw money, or charge for more than one withdrawal a month.
Making it automatic and separate is why the tax system and KiwiSaver work – they are set up to be paid into ‘out of sight, out of mind’ and growing in the background. Because we never see the money, we set up our lives to manage without it.
With your money flowing into a separate savings account as you pay yourself first each time you earn, you’ll soon start to see it pile up. But what about the idea of multiple piles at once?
Having various accounts for your different goals is brilliant – consider some of these options:
Whether it’s a starter emergency fund of $1000, or a full emergency fund of three months’ worth of expenses, having it at the ready can save you from borrowing in a crisis.
Studying, travel, a family wedding, a first home… what’s on your horizon? Most goals take money, and your saving will be what helps them happen. Our goal planner can help you set yours today.
For the truly long-term goals in your life, like stepping back from paid work, you can invest your savings in funds like KiwiSaver. It’s remarkable what you can achieve over the long run, particularly with the power of compound interest – here’s our guide.
Our savings calculator can show you how quickly you can reach a savings goal and how your interest or investment returns compound and grow, too.
Try our savings calculatorThis is where that little trick called ‘paying yourself first’ works wonders. You set your savings aside as soon as you’re paid, automatically to a separate account. But it’s easy to see how with inflation and rising costs we may find ourselves slipping backwards and dipping into savings or even going into debt. We really need to make sure every single dollar has its job to do in our budget. Here are some tips for making your money go further.
Sometimes saving’s just not possible when you’re doing it tough. That said, many of us tend to inflate our lifestyles to be in line with our pay, no matter how much it is. We spend as much as we earn, and then some (using debt). A spending plan helps, as well as what’s called ‘paying yourself first’. The idea is, before you pay everyone else, you automatically tuck money away, even just a small amount. This way it goes to your goals – not someone else’s.
That’s pretty good for sure, and it gives you peace of mind that all your bills are taken care of. That said, you may find that some of the expenses you’ve set up are holding you back from saving as much as you could. There might be subscriptions you aren’t really getting a lot out of, or utilities you are paying too much for because you haven’t researched the alternatives. Paying yourself first helps you focus on and maximise your saving, which gets you to your goals that much quicker.
It depends on your plans for the money you’re putting aside and how soon you want to use it. Savings accounts and term deposits are convenient to stash cash, especially for something like an emergency fund or a short-term goal like a holiday – as you can access the money easily when you need it. They’re relatively safe places to park our money and earn a bit of interest, but returns on bank deposits aren’t typically as high as other types of investments. So for longer-term goals you might want to look at some other investment options. Term deposits are often taxed at a higher rate than funds like KiwiSaver, too. Here’s more on investing in term deposits. And here’s more on other types of investments.
Both, ideally. And without setting aside savings, there won’t be anything to invest! But it always will depend on what that money is for. If you are saving up an emergency fund, for example, you wouldn’t typically lock it away in a longer-term investment. If you are saving up for a house or retirement, you’ll probably want to invest in order to hit those larger targets you’re aiming for. Because these bigger goals take much more to achieve, for many of us investing is part of our future. Here are some fundamentals to investing.
Whatever gets you the most back. That’s typically paying down debt, but it helps to have an emergency fund in place first so that if something pops up, you don’t get further into debt. If you're carrying costly debt from a payday lender, store card or credit card, paying it off is almost like getting a ‘sure return’ of that high interest rate. The interest on savings is typically much lower. Tackle your debt today.
Yes. It’s best to have your emergency account separate and at the ready. So even though that money will be mostly sitting idle and not earning much interest, it’s probably best in an online savings account. You wouldn’t want it locked away for longer than a month or two typically. That said, as you build your emergency fund to cover 3, 6 or even 12 months of expenses, you could consider splitting some into term deposits that can earn a bit more, cycling them on and off when their term runs out. Here’s more on starting your emergency fund.
Saving for the long-term is the easiest and hardest kind of saving. Hard because the goal is so far off and hazy to focus on. Easy in that your saving only needs to be little and long. Being automatic helps immensely too, which is why investment schemes like KiwiSaver are so effective. To reach long-term goals, your savings will need to be invested, since there is inflation to overcome (when our money buys less and less as time goes by). Here’s more for when you’re getting started saving and investing.
Don’t know where to start? Our 6 steps will help you to take control of your money.
Head to the 6 steps
