SMALL changes to your weekly spending really can deliver huge long-term benefits for both borrowers and savers, a new analysis has found.
Cutting back on buying one takeaway coffee each day can save you $45,000 over the life of a mortgage, eating out a little less would save you $72,000 in interest costs and cut four years off the loan, while swapping a fortnightly cinema visit for DVDs can save $38,000.
Wealth management firm Yellow Brick Road has crunched the numbers on a range of simple weekly expenses that we often overlook.
It found making a few relatively small changes can cut the interest cost of a typical mortgage by more than $200,000.
Executive chairman Mark Bouris says there is no magic when it comes to saving money on your home loan.
“If there’s magic, it’s just in the simplicity of it,” he says.
“We always assume there’s some complex formula.”
Bouris says many people don’t act on cutting their small costs because they don’t think it will have much impact on their mortgage.
“But this is a huge impact,” he says. “This is the power of compounding in reverse.
“One of the brightest guys in history is Albert Einstein, and he said the most powerful force in the world is compounding. The process works exactly the same way in terms of saving, but it’s a little bit more compelling with debt because debt is scary.”
On the savings front, eating out a little less often and diverting the $120 a month into a savings account earning 5 per cent interest will grow to $19,000 in a decade. Cutting out a coffee a day would grow to $11,000 in that same period. “We think rich people get fancy advice,” Bouris says.
“They don’t. They apply simple rules and they stick to them, day in, day out and week in, week out.”
Catapult Wealth director Tony Catt says one of the best ways to eliminate those little weekly costs is to review all of the direct debits you have.
“I have some clients who are stopping all direct debits because they feel they are paying for things they might not still be using,” Catt says.
“There’s a lot of money being wasted every day, every month, every year on direct debits.” Examples include old mobile phone contracts, mobile internet, gym memberships and unnecessary insurances.
“I call it the leaky boat,” Catt says. “In isolation it might not matter but when you add them up it’s a leaky boat and the boat sinks.”
Direct debits that should be embraced are those that put money into savings and investment accounts before you have a chance to spend it.
“The money you don’t see is the money you don’t miss,” Catt says. Waiting until you build up a bigger amount to start investment won’t work because most people find ways to spend it, he says.
“It’s not about how much, it’s about doing something.
“The fatal mistake with these things is people never start. They procrastinate. The hardest thing to do is to start.”
Bouris suggests asking your pay office to take extra money from your pay – perhaps $200 a month – and pay it directly into the mortgage.
“I know a lot of rugby league players whose managers do that for them,” he says.
Bouris says Reserve Bank data shows a majority of Australians are ahead of schedule in their home loan repayments.
“If you’re not part of this population ahead of schedule, you have to get on to the game because everyone else in the country has worked it out.”
The biggest barrier is not knowing and not having the confidence to take action because you don’t know, he says.