Investing and saving are the two critical life skills that can secure our future financially.
We work hard to earn money that allows us to live life comfortably. Money is spent in buying some essential and luxury items. However, should we spend every cent that we earn?
Spending all your earnings is not advisable for anyone for the following reasons:
- You will not be earning forever. There will be a time when you will retire and you will stop earning. You will require money to meet your expenses in the years after you retire.
- No one can foresee what will happen in the future. You might face a disaster unforeseen in your life like a job loss, sickness, disability or an unplanned expenditure for a family member or yourself.
- You will have to carry out your responsibilities like looking after your family and getting your children educated and married.
- Everyone dreams of buying a house or car etc. which requires large expenses.
You should set aside a part of your income that you presently earn every month to meet these expenses. This is called saving.
Draw Up A Budget:
Monthly budget is the best tool that will help you to save regularly in a disciplined way. To start saving, you should draw up a monthly budget in the following way:
1. Estimate And Categorize The Monthly Expenses:
Make a list of expenses that you expect to make every month. Subsequently, categorize the expenses into two parts: the compulsory expenses, and the avoidable expenses.
The compulsory expenses would include the essential expenses like paying the rent or power bills of your house. The avoidable expenses include some fancy items. Go through the list of expenses and ask yourself whether your life will stop if you do not make that expense to identify these avoidable expenses. If the answer is yes, then the expenses are essential, otherwise it is avoidable.
2. Flag The Expenses:
After preparing the list, you should flag the expenses where you think you can reduce the expenditure. For example, you may decide to forgo one dinner in a restaurant per month out of the three you normally have per month. So flag the expense as an avoidable item.
3. Estimate Your Outflows:
Determine how much money you would need to meet the expenses that are left in the list. You may find out the bills of the last six months and take an average to arrive at an estimate.
4. Calculate How Much Is Left:
Once you arrive at the expected expenditure, subtracted from the income that you receive per month. From this amount deduct any amount that you would need for loan repayment. What will be left after this will be the amount that you can save per month.
As a thumb rule, you should try to save 10 to 20% of your income every month.
Be Disciplined:
I have seen many individuals who will create a budget but do not follow it. This makes them go overboard with their expenses, and they find that they have not saved anything at the end of the month. In this case, remind yourself that unless you start saving immediately, you will never be able to lead a comfortable life after retirement. It might also require you to keep on working when you are infirm and old, just because you did not save money when you could have. A regular habit of saving will make your future stronger and ultimately give you a better life.
Simply Saving Money Is Not Smart Enough
Just saving is not going to be enough. Consider a situation in India. Here, putting money in your savings bank account will get you just 4% in bank interests per year.
However, the average inflation rates from 2012 till 2015 averaged at 8.05%. (It has now come down to 4.41% in November 2015)
This effectively means that if you keep your money in your savings bank account, then you are allowing inflation to eat away 4% of your savings per year.
Let us understand this with an example.
- Suppose you invest Rs. 100 in your savings bank account.
- You will earn an interest of 4%, i.e. Rs 4 at the year end.
- However, in the next year, Rs. 100 would be worth Rs. 92 due to the inflation.
- Thus, the actual return that you would be earning will be Rs. (92 +4) = Rs. 96.
- So your investment of Rs. 100, is now worth Rs. 96. Effectively you have lost Rs. 4, that is 4% of what you had invested at the beginning of the year.
Scary? You bet it is. So how do you combat the situation?
Invest, Don’t Just Save!
The answer is quite simple. You have to find a way in which you will earn returns that are more than the inflation rate. To do this, you will have to invest your savings and not just park it in your bank account. Do not make the mistake of equating savings with investment. Saving is keeping aside money from your monthly income to meet your needs in the future. Investing is the activity of selecting an asset that is expected to give you returns above the prevailing inflation rate, and purchasing that asset.
There are different assets, in which you can invest your savings. This would include conservative assets like fixed deposits and bonds, and higher risk assets like exchange traded funds, equity mutual funds, shares etc. When these assets yield you returns higher than the inflation, then you will set out on the path of wealth creation.
Remember that it is not enough to just save. But investment makes your savings earn returns for you whereas, savings will keep your money lying idle. This is the way in which wealth is created by wise people.
Take Expert Advice:
It is strongly suggested that you consult a financial adviser who will understand your requirements and get you started with investing and saving. Remember that not every asset is suitable for every investor. The assets that you need to select depends on many factors, one of the major ones being the risk that you are willing to take. Your financial adviser will be able to systematically assess your risk-taking capabilities and goals, and will help you to select the assets that are suitable for you.
Another matter that you need to remember is that you can receive better returns if you stay invested for a longer period. Thus, invest for the long-term, and do not turn your investment portfolio unless it is absolutely necessary.
Start Saving And Investing Today!
Be wise and start saving and investing it in the correct assets suitable for you and get started on the part of wealth creation. This is the best way in which you can secure your future financially.
If you have any specific questions regarding saving and investing, feel free to comment below.
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