Don’t Be A Scavenger, Juice Up Your Savings.

Last week I wrote to you about the ‘One Dollar’ savings plan.

The idea is that you look at some of your small daily, weekly or monthly spending to see if you really need to spend that money.

I gave you an example of what I did two years ago. That is, I realised I didn’t really need to buy two cups of coffee each day from the local cafe.

Instead, I decided I would be just as happy buying a box of tea bags and making two cups of tea each day. By making this small change it has saved me over $2,400 since then.

Well, over the weekend, I’ve taken the savings a step further. My wife and I did a stocktake of some of our larger weekly and monthly outgoings.

What I found stunned me.

I won’t give you the number because I’m too embarrassed. But let me put it this way: we’ve identified cost savings that will save us an extra four figures every year…that’s on top of the $1,200 a year I’m saving by not buying two coffees each day.

What brought this on? What was the catalyst that got us thinking about saving more? Well, I don’t know what it’s like where you live, but in our neighbourhood, this week is ‘Scavengers’ Week’, and it reinforced to me that I never want to be a scavenger…

I call it ‘Scavengers’ Week’, but the official term is the council’s annual Hard Waste Collection.

I’m sure you know what I’m talking about. It’s the opportunity for households to get rid of the junk that either won’t fit in the rubbish bin, or which you can’t take to the council tip.

This past week as I’ve taken the dog for the morning and evening walk I’ve seen all sorts dumped on the nature strip, waiting to be collected.

I’ve seen old sofas, old TVs, lamp stands, stuffed toys, treadmills, bikes, guttering, basketball hoops, fans, tape decks, umbrellas, hat stands, deck chairs…I could go on, but you get the picture. (Maybe I’ve even described the pile outside your home!)

With all this junk on the kerbside, it’s just too tempting for some people…so it brings out the scavengers.

Now, I don’t want to sound mean-spirited or a snob, because I’m neither of those. As you’ll see in a moment, that’s not the point of this letter.

Heck, I remember as a youngster visiting my maternal grandparents in the English city of Bristol. I was fascinated watching the Rag & Bone man roaming the streets with his horse and cart.

You could hear him approach. First the distant call of ‘Raaaag ‘n boooone’. Then you’d hear the clip-clopping of the thick-set nag, pulling the cart full to the brim with bikes, car tyres, discarded fencing and other junk.

From the front gate I’d watch him and his horse slowly trundle past. At that age I wrongly thought he was calling out for people to give him their bones! It was creepy…but fascinating.

The point is I’m sure he managed to earn a few bob from sorting through the junk and selling stuff. But even so, (and I could be wrong) I’m not convinced he ever made a fortune.

I wonder the same thing as I see folks slowly trawling the streets at night. In the distance I see the cars’ twin red tail lights edging away. Then they brighten as the car slows, and the torch pokes out the window as the driver checks out the junk piled on the nature strip.

Yesterday afternoon I saw one car with five bikes strapped to the back, along with other bits and bobs hanging from the roof rack.

Other people are just walking the streets. They stop and riffle through the junk looking for hidden gems. Then move on to the next pile of junk. As I wander towards them, walking the dog, they slink off, doubtless to reappear after I’ve passed.

(By the way, forget the jokes about living in Frankston. I’ve seen exactly the same activity when I’ve driven through the yuppie and well-to-do suburbs of South Yarra and Malvern.)

Anyway, this scavenging activity tells me a number of things…

 Trash Or Treasure?

First, it seems that people have too much stuff if we need to go through this annual ‘stuff cleansing’ exercise.

Second, the old saying ‘one man’s trash is another man’s treasure’ appears to ring true.

Third, is the Australian economy that strong if so many people need to rummage through rubbish to find items they can use, or things they can sell?

And fourth, if the aim is to find stuff to sell, given the effort to find it, clean it and then stick it on eBay, pay for postage, or wait for someone to collect it, is it really worth it?

I seriously doubt if anyone can make more than $365 from sifting through junk in this way. Of course, I could be wrong.

Even so, I’d rather stick with another old saying, ‘work smarter, not harder’.

The fact is, finding and selling junk is hard work.

But taking a dollar from your pocket and sticking it in a jar is easy work.

I recommend the easy work.

This brings me back to the ‘One Dollar’ savings plan I wrote to you about last week.

It turns out that just three days before I wrote to you about the ‘One Dollar’ savings plan, the following article appeared on the BBC website. The headline was, ‘Secret to happiness is “saving £50 a month”’.

According to the article:

‘New research suggests that the secret to happiness is simple – save an extra £50 each month.

‘A survey of almost 2,500 people by NS&I found that savings success has a direct impact on individual’s mood and state of mind.’

At the current exchange rate, £50 a month is about $78…or $2.60 per day.

So, if we trust the research, it suggests the ‘One Dollar’ savings plan will only get you part of the way to happiness…just over a third of the way.

It’s a good start, but you need to do a little bit more.

That’s why I want to up the ante today…to show you how you can boost your savings plan into a ‘Two Dollar’, ‘Three Dollar’, or even ‘Four Dollar’ savings plan.

Again, like the ‘One Dollar’ savings plan, I’m not saying it’s perfect. But I’m almost 100% sure you’ll save and make more money this way than you will by trawling the streets scavenging for hidden gems among the junk…

Add Some Juice To Your Savings

The first step is to set aside as much as you can. Start with the dollar a day (you should have started that last Monday, no excuses).

While you’re sticking a dollar a day into the jar, piggy bank or money box, start thinking about how much more you can put aside. The important part is not to go too crazy by saving more than you can reasonably afford to save.

The last thing you want is to start grabbing a few dollars back here and there. The idea is that once you put the money in the pot, it stays there until you take it to the bank. And then it only leaves the bank when you’re ready to move to the next stage of the savings plan (or when you retire).

That’s what I’ll explain to you in the rest of today’s letter.

Saving cash is great. As I mentioned last week, for every $1 per day you save now, over 30 years it could give you an extra year of modest retirement income. If you save $2 per day, that’s two years of modest retirement income. And so on.

That’s pretty good. But what if you don’t have 30 years until retirement? Or what if you want more than a modest income?

Well, that’s where you need to juice up your savings. And the best, most cost-effective, and cheapest way of juicing up your retirement savings is in the stock market.

I know what you’re thinking. Isn’t the stock market risky? Aren’t I always writing in Money Morning about the stock market falling?

Look, I’m not saying share investing is risk-free, because it isn’t. But I do know is that if you use a conservative approach to share investing, and don’t fall into the trap of borrowing money to buy shares, you can build a healthy nest-egg.

And the best thing is you can start with as little as $500…

An Extra Month Of Saving For No Extra Work

Obviously, if you can only put aside $1 each day, it will take you just over a year to save $500. Even then I’d suggest you’re patient. Make sure you leave some cash in your savings account. Maybe wait until you’ve saved $700 or $800 before you buy some shares.

The one thing I don’t want you doing is borrowing money from your mortgage redraw account, or taking a bit from a personal loan, or heaven forbid, withdrawing cash from your credit card.

Perhaps you’re thinking, why $500?

The reason you need $500 is because that’s the minimum amount you need to buy a parcel of shares. This is an Australian Securities Exchange (ASX) rule.

Once you have $500 you can open an account with an online stockbroking firm. Then you deposit the money into the broking account and then buy the shares (you’ll need a bit more than $500 to cover brokerage costs, and the possibility that you’ll need to spend a bit more depending on the share price).

I admit to giving the share market a hard time, but it really is one of the best ways to build wealth…if you’re careful.

And the best way to dip your toe into the market is to invest in some of the Aussie market’s most conservative stocks. The stocks I’ve got in mind are reliable dividend-paying stocks.

If you’re a novice to share investing, dividends are the portion of a company’s profit that it pays to shareholders.

For instance, say a company makes a profit of $100 million. It may choose to pay $70 million of this profit to investors. If the company has 50 million shares on issue, it would mean $1.40 for each share.

So, if you owned 20 shares in this company (with a share price of $25 each), you would earn $28 (20 x $.140) every year. That’s not a bad return on a $500 investment.

What it also means is that it adds $28 to your ‘One Dollar’ savings plan. Put another way, you’ve made an extra $28 (almost a month’s worth of saving) without lifting a finger.

Pretty good right?

It’s better than scavenging around in junk for a few hours anyway!

And once you’ve saved up another $500 you can buy shares in another company, or top up your holding in the first company. The dividendfrom the second $500-worth of stock will give you a second month of ‘free’ saving for your ‘One Dollar’ saving plan.

But the real beauty of adding shares to your savings plan is that you get to combine capital growth with income. That’s because aside from earning a dividend income, you’ve also got the potential for the share price to go up.

And if the share price goes up, and the company increases profits and therefore pays out a higher dividend, it can make a big difference to your wealth…

Patience Is Profitable

Let me give you an example. In 1988, world famous investor Warren Buffett bought shares of The Coca-Cola Company [NYSE: KO] for the equivalent of about USD$2.30 per share. At the time the company paid 8 cents per year in dividends.

Today, Coca-Cola’s share price is USD$37.04, and it pays an annual dividend of about $1 per share.

If Coca-Cola keeps growing the annual dividend at the current rate, within a few years Buffett will receive more each year in dividends than he paid for the stock 24 years ago.

That’s just one example. But it gives you a good idea about the virtue of patience and buying good quality stocks. Remember, the ‘One Dollar’ savings plan is about saving for your retirement.

It’s not about making a big gain today and another big gain tomorrow. That’s trading. I’m not stopping your from doing that, but that’s something you should do with another part of your savings plan…set up a trading account that’s separate from your ‘One Dollar’ account.

Even use a separate broking account so you don’t mix up the different investment strategies.

But back to the long term savings plan. Which quality Aussie dividend stocks should you buy?

To give you an idea of where to start looking, I’ve created a shortlist for you to consider. The parameters I used are:

• Market capitalisation greater than $10 billion
• Dividend yield greater than 5%
• Dividend yield less than 10%

I’ve put a cap on the dividend yield, because for reasons I’ll explain another day, a high dividend yield can indicate that the stock is high risk.

After feeding this info into my stock screening software, of the 1,800 stocks listed on the ASX, it returned the following nine stocks:

Source: CMC Markets Stockbroking

As you know from reading Money Morning, I’m not a big fan of bank stocks. I just don’t like their business model. The banks need ever-increasing debt and I just don’t believe the global debt boom will continue.

But, you may think differently. And if you do, that’s fine. Anyway, among those nine stocks you should be able to pick at least one company that you can save up to buy.

(Disclosure: for my sins my super fund owns shares in Telstra.)

I can’t tell you which stock to buy, because you may not be ready to buy yet. If you’ve only just started putting money aside in a jar, piggy bank or money box, it could be weeks, months, or more than a year before you’ve saved $500.

That’s where you’ll need to do a bit of homework, or from time to time read my analysis or that of my colleagues.

You’ll Be Surprised

But I’ll wind up by saying it again. Put in some effort. Save $1 or more a day by cutting down on unnecessary spending, and then do a stocktake of your bigger weekly or monthly spending (remember, this weekend my wife and I worked out we can save a four-figure sum each year by making a couple of simple cuts).

Do that and I’m convinced you’ll be surprised by just how much you waste…and how much you can save.

Bottom line: saving money doesn’t have to be hard. Make the right savings and it doesn’t have to have a negative impact on your current lifestyle.

Start today, and be sure to let me know how you get on by dropping a line toletters@pursuitofhappiness.com.au

Cheers,

Kris Sayce.

Editor, Pursuit of Happiness

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