Saving is the first stepping stone of Personal Finance. Wealth creation process starts only when we start saving. Saving is the first process which leads us to Financial Freedom. Saving always starts in your mind first then you implement it in reality. Many people find it very difficult to sacrifice their current enjoyment for the future which is uncertain. They want to live today and take the day as it comes. This philosophy is very risky. One should give proper importance to Saving and Investing which in turn assures us a bright future.
What is saving?
Saving is the residual amount of our income after all our expenses are met.
Saving= Total income-expenditure.
Most of the time we think of saving after all our expenses are met. Are we really able to save when we follow this approach? Expenses are bound to happen if we have money by our side. Expenses are never-ending. We should change our perspective toward our saving. Should we reverse this approach? Yes, we should. We should keep aside some percentage of our monthly take home and spend the rest.
Saving and Investment go hand in hand. An investor does Saving first then he invests that saving in different asset classes to generate income. Investment is a process where we make our savings work for us.
Investing should start as soon as you start saving. Saving rate depends upon your age and your responsibility. People from 20 to 30 age group can save more than those who are in their 40s as their family responsibilities are less compared to those of 40s. Basically, if you are young, single or recently married and no immediate responsibility of raising a kid you should save at least 40 to 55% of your net income. This saving converted into wise investment will be helpful to build a sizable corpus after 25/30 yrs.
Starting early in life make you stand far ahead of the crowd. If you start saving early you can be benefited by Compounding Factor tremendously. One more advantage is that you can invest a smaller amount initially and increase the proportion gradually as your income increases.
Following pointers will be helpful to increase your savings:
- Record your expenses Even if you earn 10 to 15 k a month you can save a good amount of money if you monitor your expenses. Basically, expenses are categorized in Needs and Wants. When we try to avoid spending on Wants you save a substantial amount. Penning down will help you to know where your money is going. (Refer my thoughts on how to separate needs from wants Needs Vs Wants : Personal Finance Basics
- Open a separate bank account. Transfer the amount you decided. And lock it. Withdrawals for any kind of expenditure should not happen from this account. Once you are used to this arrangement you can start investing this saved amount.
- Segregate your expenses in these two buckets. Expenses are of two types. The first category is Fixed Expense. It includes expenses such as rent, society maintenance, school fees, fixed medicine cost, payment to maids, property tax, insurance premiums, etc. And the second one is Variable Expenses which are food, conveyance, electricity, telephone, entertainment, groceries, etc. While making efforts to increase our saving we should focus on fixed expenses and try to reduce your variable expenses.
- Categorize your expenses. Expenses can also be categorized as Needs and Wants. You should understand what is your need and which expense is for your want. Try to avoid spending on hoteling, a short vacation, outings, cinema, parties, etc frequently. This will help us to focus on your Needs and save money too. For more information on this please Refer Needs Vs Wants : Personal Finance Basics
- Make your monthly budget. Once you have an idea of what you spend in a month, you can begin to organized your recorded expenses into a workable budget. The budget will help you to plan your spending and limit overspending.
- Savings can be started from One single rupee as well. Saving means your income – your expenses. If you have One rupee and you managed to spend 85 paise you still able to save 15 paise. Here I am trying to say is that Saving should start from our mind first and accordingly, we should follow the process to control our expenses which will result in a saving.
- Choose something to save for. One of the best ways to save money is to set a goal. Decide your goals first. Investing without a goal means investing randomly which may not be sustainable and can be stooped any time if any emergencies happened. Goal-based saving helps to be focused and disciplined in investing until the goal is achieved.
- Decide on your priority. Your goals can be short term as well as long term. You have to prioritize the goals and keep saving accordingly. Map percentage of saving amount with every goal.
- Make saving effortless. Almost all banks offer automated transfers between your checking and savings accounts. You can choose when, how much and where to transfer money or even split your direct deposit so a portion of every paycheck goes directly into your savings account.
- Find the ways to save in your day to day life. Use public transport this will save money on petrol. Apply for prepaid mobile connection instead of prepaid one which will keep an eye on your calling.
- Check your habits. Avoid wasting your hard-earned money on smoking and drinking. Smoking and alcohol not only kills you slowly but it kills your family as well. Focus on your health which in turn help you save medical costs in the future.
- Never get into the debt trap. Please never take any expensive loans to fulfill your aspiration. The debt will hamper your saving.
- Pay your utility bills on time to avoid penalties. Keep the last date of payment in mind. Note it don on the calendar. Know the energy savings tips and save money on the electricity bill.
- Don’t use a credit card. Instead, use debit card by which you can see the bank balance after every expense.
- Start paying by cash if needed as it pinches more when you spend hard cash rather than plastic money.
- Don’t get carried away with the surrounding people, avoid the tendency of the showing off.
- Try to find alternate income resource to fund your expenses. You can covert your hobbies into classes, can take up freelancing projects, knowledge sharing economy, etc.
- See your savings grow. Review your budget and check your progress every month. Not only will this help you stick to your personal savings plan, but it also helps you identify and fix problems quickly.
Gradual sustainable increase in saving every year with an increase in income will help you to achieve your dream target.