ARE YOU SAVING
REGULARLY
We have all heard the famous quote “A penny saved is a penny
earned” which actually indicates that saving some money is like earning it else
it could have been used for spending. Typically in the younger age when one
starts working, most don’t feel the need to start saving as there needs to be a
strong reason to save. Most young and working individuals have parents who are
still in their employment and they have a house and all amenities provided by
their parents which doesn’t create the seriousness to save. It also depends on
what money values one acquires in the younger age from their parents.
WHY DO YOU NEED TO
SAVE
For buying anything today we require money. We live in a
world full of uncertainties and our jobs also don’t provide us with any
security. What if there is a lay off? What if someone in the family falls
critically ill or needs to be hospitalised and there is no medical cover? One
can be exposed to such contingent events and not having the money to see
through those difficult times can push one into debts. Therefore one motivation
of saving can be to create a contingency fund or maintain some surplus cash
separately to face crisis situations. Satish (36) and Anil (31), who have been
working in the oil rigs as technicians have lost their jobs recently. Even
though both are tensed on the future of the oil industry and their careers,
Satish is still better off than his younger colleague due to his good savings
and investments that he has done over the last 10 years. Anil never felt the
need to save regularly as his parents were independent and his income was good
enough to take care of his wife and child’s regular expenses. Most of us wake
up only when crisis reaches our doorstep.
We also need to save if we intend to make purchases in the
future like buying a car, house, etc. Retirement is also a reality which one
needs to plan in advance and for which one needs to start saving early.
HOW MUCH YOU NEED TO
SAVE
There is no standard rule which can apply to everyone. People
in the early 20s can start with 20% as their income would be less initially and
other expenses also need to be factored in. As income increases, this
percentage should go up. Having a budget enables one to estimate the regular
expenses and explore the savings potential. For example, Keshav(25) stays in
his parents’ house and most of his household expenses are taken care of by
parents regular income. He draws a monthly salary of Rs. 18000 and he is able
to manage his travelling/ other expenses within Rs. 10000. So he has the
potential to save around 45% of his income. For someone who has additional
expenses like rent, parent’s medical expenses, etc, the savings could be lower.
The important point is to save at least some amount regularly. For someone in the
higher age brackets (30-40) the savings % should be higher than 30%. Saving
enables one to invest that money as per their goals and also earn a better
return.
BENEFITS OF STARTING
EARLY
The early you start saving and investing, the better you are
in terms of achieving your financial goals. The power of compounding comes in
play when you give more number of years to your investments. For someone who
starts late, the number of years available is less and the investment that one
will need to achieve that goal also shoots up. For example, Ajay and Jai (both
of 25 yrs) decided to save to create a down-payment of Rs. 25 lakhs in the next
10 years to buy a home. Ajay started in the first year itself by investing in
balanced mutual funds. He invested Rs. 10900 per month to reach his goal
assuming the returns were in the range of 12%. Jai started investing 3 years
later in the same funds but since he is 3 years late, he needs to invest
Rs.19150 to reach his goal. Starting early certainly helps.
MAKE SAVINGS A HABIT
Setting goals early can help in inculcating savings habit.
For example when you are clear that you want to buy a car in next 5 years, you
will certainly start saving the required amount every month. Whether it’s an RD
or Sip in mutual funds, once you have decided the amounts, you only have to
instruct for auto debit once and then it becomes part of a regular process.
Technology has actually enabled ease of saving regularly. The best part could
be to provide debit dates immediately after your salary credit dates so that
you meet your targeting saving goal.
(This was published in moneycontrol on 7th October 2015)
http://www.moneycontrol.com/news/planning/are-you-saving-regularly_3460961.html
