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How to save and invest money smartly
Simple tips to achieve your life’s financial goals
Savings is truly an art because lot of people just don’t get it right. It is not difficult to imagine that in an age and time we are living in, EMI’s and credit cards are more important than the humble savings. For a moment, just add the number of hours you spend every week earning money. Anywhere between 40-60 hours?
Now add up the number of hours you spend in managing that money?
By recording your expenses, creating budgets, looking at your savings and investments.
The answer would be nil to an hour. And therein lies the problem. We spend all our time in earning money and very little in managing it well. If we spend even 5 per cent of our time in managing money, we would not be required to work as hard as we do, to earn money.
What is savings? Why do we need to save?
Very simply put, savings means “the money not spent”.
It is the amount that you have earned but not spent and rather have set it aside towards your future needs. So why does one need to save? If you earn a lot and spend a lot and have a good lifestyle, isn’t that good enough? Well yes, it is very good for the economy but definitely not good for you. You need to save because there are certain things in life which you cannot do with a month’s or even a year’s earnings.
Let us take an example.
A person typically starts working in mid-20s and continues to do to until mid -50s or so. At this stage the active income stops. Now if s/he continues to live till 80, s/he has 20 or more years of life during which s/he is not actively employed and is also most vulnerable to health issues. Where would the money to support these 20 years come from? Savings.
You have to save towards your retirement needs during your working years, else the great lifestyle you enjoy today would also have to retire with you.
One basically needs to save for certain future goals -- it could be planning for your higher education and marriage, buying a property, planning for kids education and marriage, vacations and retirement. These things typically may not be possible to do with your regular monthly income and would require large chunks of money from your savings.
The author is chief evangelist, Perfios.com
How to save and invest money smartly
How to inculcate the habit of saving?
Here are some pointers to managing money well and putting aside bit-by-bit towards a secure and comfortable future.
1. Learn the art of balancing immediate gratification with future security. It may be difficult to put aside money towards an unknown future when there is an attractive piece of clothing or a fancy gadget staring at you. With a credit card at your disposal, the choice is easy. This brings us to the point of what your equation is. Is it “Income MINUS Expenses = Savings” or is it “Income MINUS Savings = Expenses”? We recommend you adopt the second equation in your life. Set a target for savings and fulfil that target as soon as you get your pay cheque. The balance is available for you to spend, guilt free.
2. How much to save? The answer to that will really depend on your future goals, but let us put it simply as ‘as much as possible’. Of your income, a maximum of 40 per cent can go towards EMIs and another 40 per cent towards your regular expenses. As a thumb rule, target saving at least 15 to 20 per cent of your income, if not more. Of course, higher the savings percentage, the better it is.
3. Budget your expenses: A budget is a great way to keep a check on your expenses, which in turn can impact your savings. Broadly divide your expenses into different heads such as Fixed Expenses -- Rent, EMI, school fees etc.
Variable: Non discretionary -- Electricity, petrol, maid, groceries, utilities etc
Variable: Discretionary -- Shopping, eating out, entertainment, gifting, travel etc.
While the first and second may be largely fixed, it is the third component where one can easily go overboard. Hence fixing a budget for these sets of expenses is crucial.
4. Savings is not money to be kept under your mattress and hence needs to be invested. While you need to invest in the right products depending on your risk profile and goals, opt for the ECS facility wherever possible. The money should be invested without any manual intervention from your side and should happen automatically, preferably every month. For example -- Systematic investment plan (SIP) facility provided for investing in mutual funds or monthly ECS towards your ULIP or PPF.
5. Keep targets and reward yourself on achieving your targets for savings and expenses. Always look to outperform your targets, that is save more than targeted and spend lesser than targeted.
How to save and invest money smartly
Manage your invested savings well
While saving money is extremely important towards a secure and happy future, investing the savings in appropriate instruments is equally pertinent. This is the process of creating wealth. While you can do this on your own, it is better to avail the services of a planner or advisor to ensure that you don’t make mistakes and you are on the right path towards meeting your future goals. Finally, the objective of saving money is to ensure that you can achieve whatever goals you had set out for yourself in future.
Keeping a balance is very important. Savings should not come at the cost of sacrificing your present. You must enjoy your present and keep an eye on the future. One doesn’t need a lot of money to start saving. Start small, and gradually build up. Important thing is to inculcate the habit of setting something aside.