Tuesday, October 13, 2015

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.
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.
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.   
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.
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)

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