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No matter how much you earn, you have to SAVE!

June 17, 2010 10:14 IST
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There are 2 friends Mr X and Mr Y both in their late 20s. Mr X has a monthly income of Rs 60,000, while Mr Y has a salary of Rs 40,000 per month.  However, Mr X's job is more stressful and demanding; while Mr Y has a comfortable job with low stress levels and better work life balance.

Mr X lives a lavish life. He spends most of his salary saves inconsistently. On the other hand Mr Y is very regular in savings. From his monthly income, he saves Rs 15,000 a month in the following investment options.

  • Pension - Rs 3,000
  • Child plans - Rs 2,000
  • Mutual Funds - Rs 4,000
  • Emergency fund - Rs 1,000
  • Vacation fund - Rs 1,000
  • PPF - Rs 2,000
  • Medi claim - Rs 2,000

Suppose at the age of 44 years, both have a medical emergency. Due to lack of savings Mr. X would be stumped. However, in case of Mr. Y

Monthly savings


Rate of interest (Compounded annually) 

At the age of 44 years

Pension – Rs 3000




Child plans – Rs 2000



Mutual Funds – Rs 4000




Emergency fund – Rs 1000


Cash in hand


 Vacation fund – Rs 1000


 invested in savings account @3.5%


PPF - Rs 2000




Medi claim-   Rs 2000


 Sum assured 2,00000

*At a assumed 6% rate of inflation per annum, 16 years later, Mr Y would need almost Rs581,741/- to finance his child's MBA degree. Assumed post tax returns of 5%

** PPF is invested for 15 years

Mr. Y would have sufficient funds to pay off his medical emergency.

One can never predict life.  One can never know when bad times can come. Hence it is very necessary to save for such rainy days.  One should make a habit to save, be it a small amount.  Here are some steps which one can follow.

Check on expenses: This is the foremost step. You should keep a check on monthly expenses. Unnecessary expenses should be avoided. One way to know how much one spent for a month is by having a monthly budget. This will show where the money is spent and also regulate the cash flows. By this you can see areas where there is room to cut back on spending and save money.

This will free up cash which can be used to pay up existing debt or help save for the rainy day. Reducing spending, as opposed to earning more money, is the real key to gaining control of finances.

Also you must ensure that some money is set aside to cover monthly expenses for at least three months. These funds should be set aside such that can be readily accessed in case in times of emergency or contingency.

Pay off debts/ credit card debts: Paying off your debts early is one of the best investments you can make, specially paying off debts which have high rate of interest charges.  This includes the credit card payments which generally have higher interest costs.

Have discipline: Having discipline is extremely important. You have to have discipline in the way one spends and controlling one's expenditures. It is the key to reduce liabilities and debts and save more. As per a famous trading and investing legend -- One must not spend time looking for the Holy Grail of investments or trading systems. It doesn't exist. The Holy Grail is within you. It's not the investment that's going to determine success or failure. It's the discipline of the investor.

A steady plan of saving and investing helps attain one's goal. With discipline and time one can reach goals.

Importance of saving:  Here is a simple example. There are 2 friends, Mr. A and Mr. B. Mr. B saves Rs 500 per month. Mr. A saves nothing. Over the years, here's what happens.

At rate of 5%

Monthly amount saved (Rs)

1 Year

5 years

10 years

20 years

30 years

Mr. A







Mr. B







The discipline of saving regularly has helped Mr. B be richer by Rs 19, 931. Also what you earn is not as important as what you save. If you spend everything you earn in futile pursuits and wasteful expenditure, then there is no point to the amount earned.

Invest:  Start the wealth-building exercise by investing in low risk investments. Once the base is strong, then increase the risk exposure by investing in higher return investments.

Also do not lay the eggs in the same basket. Your risk tolerance level goes a long way in defining your investment approach. But do remember your investment objectives before you subscribe to an investment plan.

Low risk

Medium Risk

High Risk

Bank Deposits

Balanced Mutual funds


PPF, Government securities

AAA bonds

Real estate

Fixed deposits


Follow systematic investment plan:  Invest at regular times. By doing an SIP, you can SIP (sleep in peace). This will help you reduce the cost and earn higher returns in the long term.

As seen in the case of Mr. Y, that by saving regularly he was able to meet the medical emergency with ease. By following these simples steps, one can make your money last longer.

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