5 Simple Rules to Maximise Your Savings

  • 21st Dec, 2012

Every year we take some resolution on our birthday or the New Year – like exercising for 1 hour daily, reading a book every month, etc. This year let’s add “save more and invest” in our resolution list. This resolution will go a long way in maximizing savings in the long term, resulting in a much better and happier financial life.

In this article we give you the hands-down approach on planning your savings smartly.

Pay off your debt and credit card bills on time: It is better to have low savings or investments for a short period of time, but being debt-free and starting clean will help you build a much better foundation for the future. Effectively managing debt and credit plays a very important role in achieving financial freedom and stability. It is advised to pay off your high interest debts, particularly credit card dues, as early as possible. Unfortunately, today’s youngsters are the main victims of the credit dept spiral.

A typical free credit period in India is 45-51 days. If you pay off the dues within this period, the interest is saved. If you are unable to pay off the entire amount within the due date, a common practice is rolling over the dues after paying the minimum amount. This is expensive as you would have to pay an interest of about 3 % per month (yes, 36% interest p.a.!) on your dues, and the bad news is that the new purchases made will not get any interest-free period until the dues are completely settled. Many people are still not aware of this.

Hence, it is always advisable to pay your card’s bills well within the prescribed time, thus avoiding unnecessary charges such as overdraw charges, late payment, interest cost, etc. All this adds up and you could save Rs.5000 to Rs.50000 every year.

Track your expenditure and create a cash flow statement: This month, try to record everything you spend.* The expenses can be divided under heads like:

  • Household – Food and groceries, rent/maintenance, conveyance/fuel and maintenance, healthcare, utilities bills, housekeeper, mobile;
  • Lifestyle: clothes and accessories, shopping/gifts, dining, movies, personal care, vacations;
  • Dependent Expenses: Children’s schooling and other expenses, contribution to parents’ retirement;
  • Insurance Premium: Term Insurance, mediclaim, vehicle insurance, other insurance;
  • Loan Servicing: Home loan EMI, vehicle loan EMI, personal loan EMI.

* If there are any yearly expenses – Divide the same by 12.

All this will tell you what your net outflow is every month. Deduct the same from your income to check what your net saving is every month.

At least 10% to 20% of your total monthly income should be saved and invested towards your goals. If your expenses don’t allow that, look for ways to cut back, like trimming the lifestyle expenses.

Pay yourself first: Most of us have a habit of saving only what is left at the end of month in our bank account, which is not a disciplined approach. On the contrary, we should become a little smarter and pay ourselves first. That is, whenever we receive a paycheque or other income, we should first save/invest a part of it and then spend the remaining amount. By doing this we will not feel guilty about our spending as we already have kept some aside for investment purpose.

Pay attention to taxes: The Government of India and Income Tax Authority want to promote savings and investment and give tax breaks under various sections in order to encourage people to do so. Hence it is advisable to do proper tax planning every year and invest in avenues which give tax breaks. This can help you to save up to Rs.50000 every year on taxes, which is not a small sum by any means.

Set savings goals and invest with discipline for that goal: Attaching a goal to a savings and investment plan will always motivate you to stick to the plan. The goal can be short-term like: travelling or buying a car. Alternatively, the goal can be long-term like: retirement. For each goal, figure out how long you have to save for it and set your monthly savings target towards that amount. There is a facility in mutual funds called SIP (Systematic Investment Planning) which sets up automatic transfers from your savings account to the designated investment. As is rightly said – if you don’t see it, you won’t spend it!

Investments should beat inflation: If our savings are meant for very long term goals like children’s education, children’s weddings, retirement, etc., then it would make more sense to ensure that the returns from our investments should beat inflation. If they fail to do so, then the whole purpose is defeated. We may consider bank FDs safe but if they don’t help reach the target amount, then what is the purpose of having it in the first place? This is where equity investments like direct equity, equity MFs or equity ULIP can give better inflation-adjusted returns in the long term, than the popular fixed income instruments.

Conclusion: Finally, I would like to conclude by a quote from by Ron Lewis: “It’s never too early to encourage long term savings.” I would advice every investor to start saving and investing at least 10% of their monthly income towards their goal. The earlier you start saving, the more time your money has to benefit from ‘the power of compounding.’

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