Unfortunately, Australians as well as the rest of the world are under educated in three of the main points when it comes to saving money. Working your entire life and putting money into your superannuation and a savings account is not what it takes to saving money and building a secure future. Knowing how your money works and what its worth over time is as important as the actual number on your bank slip but a surprising number of Australians have no idea how to explain some of the most basic financial concepts that affect their savings.
You might have heard from your financial adviser or on the financial segment of the night time news talk about interest, risk, and inflation. But you may have never taken the time to understand what these concepts really mean and how they affect you when you are saving money.
Saving Money via 3 Smart Ways
Interest might be one of the most familiar since you probably have a credit card with an interest rate or you might even have a home that you have a mortgage on which means that interest is very important to you. When you boil it down, interest is the fee that is paid to borrow money. When the interest rates that are set by the Royal Bank of Australia, it has a direct effect on the interest rate on many mortgages and savings accounts in banks. If you are saving money then the compounding of interest on your savings increases your wealth even more.
Diversification of risk can be summed up by the old expression “Don’t hold all of your eggs in one basket”. Diversification of risk in real life means spreading your investments around in things that do not all move the same way in the market. The equity you have built up in your house is a great form of investment but house prices occasionally crash just like the stock market and you would not have all of your capital tied up in just one stock either. Spreading risk out among several money saving vehicles ensures than in the event of a crash in one market, you will have gained or retained some wealth in another.
Inflation is what eats away at your wealth over time. Money loses its worth as time goes on and that is why it costs more for the same things as the years go by. It is important to calculate inflation into future cost of living since things will inevitably cost more in the future.
Understanding these three concepts and factoring them into your savings plans will help you with your financial security today and in the future.