Updated on: June 15, 2020 ; Behaviour
Why do you need Savings?
Savings will provide the required corpus of funds that you need for your investments. This corpus will come from the savings you have made and planned for the future. If you need to understand why do you need to invest, read the article on Investment – Basic Elements.
Savings will provide the principal amount to start your investment, it will also provide the funds you will need to keep supplementing your investments regularly. This is crucial for the balanced growth of your investment.
It is also very important that investments are given enough time to grow. So, you need to infuse the funds early and regularly. To understand the importance of investing at the right time, please read the articles on Time Value of Money and The wonder called Compounding.
How do you start?
Savings is the money you are left with after deducting the expenditures from your earnings.
Savings = Earnings – Expenditure
The equation is very simple and easy to understand. There are only three simple ways of increasing your savings:
- Increase your earnings
- Cut down on your expenses
- Both of the above
All of us strive to increase our earning, and I need not say anything more on this point as you know what works best for you. More often than not, increasing your earnings may take a bit of time.
The other part of the equation is more in your control. You have some bit of control over your spending. With time and discipline, you can get it to a desirable level. You need to start by figuring out how to reduce or delay your expenses. You don’t need to start with a big bang, start small. It sounds very simple, but acting on it may be difficult. You just have to keep trying till you get the right balance. After that, it becomes easier. Remember, the journey of investment is long and enduring. So, don’t rush and become impatient if you feel things are not moving ahead at your expected pace.
I would also like to point out that in some extreme cases, the expenses may go over your earnings. This is possible because of easy access to credit. If you find yourself in such a position, then please close all your outstanding loans as soon as possible. Avoid such traps at all costs.
Once you have achieved a healthy balance between your earnings and expenses, you can start planning your investments. Don’t feel left out if you are starting late or small. At least you have made a start, and you will catch up soon.
7 tips on savings and expenses
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There is no scarcity of tips and suggestions on how to save and spend. You can find loads of them everywhere. I will try to keep this section restricted to a few critical ones.
1. Delay purchases if possible: Some things depreciate in their value over time. You might want to delay such purchases if there is no immediate need for them. You can invest that money in some short-duration investment vehicle instead. There are also slight chances that you may get a better deal on the item later on. For example electronics and appliances purchases.
2. Round off your purchase amounts: If you have any difficulty in getting started with your savings, then this trick might help you. You need to round off the price of your purchases to the next logical place of your comfort. Then transfer or set aside the rounding off number for your investments immediately. For example, if you purchased any product for 2,910 rupees, you can round it off to 3,000 rupees. The amount of 90 rupees can be used for your investment. This way, you won’t feel the pinch of keeping aside a separate fund for your investments. As you get comfortable, you can increase the rounding amount for your purchases.
3. Don’t just buy because you got a good offer: You are and will be bombarded with thousands of tempting deals and offers. You might feel that if you miss out on them, you will never get anything similar later. There is nothing wrong with buying anything on offer, but you need to decide if it is necessary. Before you make any such purchase, just ask yourself a simple question. “Would I have bought it if I had not seen the offer”? Please avoid unnecessary purchases. If you already had plans to buy something and you got a good deal on it, go ahead and buy it.
4. Don’t upgrade just because you got a great deal: This is similar to the point above. When go to buy a product, you might find a better model version with additional features or extra freebies at a discount. You might go ahead and buy it. But before you make the decision just ask yourself these questions. “Are the extra features or the freebies useful to me”? “Would I have bought the higher version if the offer were not there”? Refrain from spending additional money on the features that you don’t need. If you can save that money by going for a lower version that is cheaper, go for it. There are aspirations which you need to fulfill, so don’t be too hard on yourself always. Try to see if you can follow this tip on a few occasions.
5. Try to avoid unnecessary credit: Thanks to the credit cards and many lucrative EMI options available, buying things has become very easy these days. We don’t have to worry about the availability of cash anymore. There is also the risk that you might end up spending more than what you had budgeted for. Now, instead of buying on credit and paying for it later, can you reverse the order? Can you save the money upfront? Save the money equivalent to the EMI every month. Once you have accumulated enough funds, go ahead and make the purchase. There are two advantages to this approach. First, you save on the interest paid to the bank. On the contrary, you could have parked the money in some instrument and earned some interest. Second, by the time you have accumulated the funds, you may get a better product or a better deal.
6. Don’t give in to peer pressure: It is very natural to get tempted by what people in your peer group have purchased. No one gives you this pressure. It is you who takes this pressure on yourself. Next time you get tempted, ask this to yourself. “Would I have been tempted to buy the same or similar product, if my peer had not purchased it”? Please bear in mind, no matter how well you might know your peers, you won’t be privy to their finances. You won’t know about the other factors that influence their purchases or the compromises they might have made. So, stop making comparisons and think practically before you make any purchase decisions.
7. Save first and spend later: This is forceful saving. You will have to set aside the savings as soon as you get your earnings. Then manage your expenses with whatever is left. You will have to account for the recurring expenses before setting aside the funds for savings.
Conclusion
Savings provide the corpus of funds for your investments. You will need to manage your earnings and expenses to optimize your savings. You need not follow all the tips. These are just basic guidelines. Use your judgment, think objectively, and save accordingly.
You may start small but start early. Good luck with your savings!!!