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The Ultimate Standoff: Savings vs. Earning

The Ultimate Standoff: Savings vs. Earning


Discipline plays an important role in life. The rule applies to money management too. More savings and lesser liabilities are outcomes of effective money management. It does not mean that you need to have a huge income for a good saving. For this, you just need to be disciplined in investment. Investment does not determine success or failure, the discipline does.

Let’s understand it with an example: Suppose there are two friends Mr. A and Mr. B, both of the same age, say 25. A earns Rs. 50,000 per month while B earns Rs. 20,000 per month. Now, the profile of A is demanding and work is more stressful; while B has a better work-life balance and hence lower stress.

Subsequently, Mr. A has a lavish lifestyle and spends most of his salary; saves money but inconsistently. On the other hand, Mr. B is particular about savings. Out of his total salary of Rs. 20,000, he saves Rs. 10,000 per month in the following manner- medical insurance premium: Rs. 1000, emergency fund: Rs. 2000, child plan: Rs. 2000, pension: Rs. 2000, mutual funds: Rs. 1000, vacation fund: Rs. 1000 and PPF: Rs. 1000.

Read More: Understanding Mutual Fund SIP from the Scratch

Investment Pattern: It is clear from the investment pattern of Mr. B that he has invested and saved money in a much-planned manner and hence he will have ample financial resources anytime he will be in a need of them. B has diversified the portfolio too, just to have a balance in returns from the investment. Even if the interest rate of PPF falls, he may get the required return from mutual funds and vice versa. Again, his savings plan is also perfect as he has made different funds for various anticipated financial needs.

Now, suppose after some years both meet any medical emergency. It is very clear that Mr. A will be in a problem due to a lack of savings. However, Mr. B will be trouble-free as he has a lot of savings. Taking into consideration the rate of return on various savings and investments, it is pretty obvious that Mr. B’s funds will multiply as he has invested in different avenues.

Here are some tips for you which can be followed to save more money:

1) Track Expenses: You need to keep a check on your monthly expenses in order to eliminate unnecessary expenses. This can be done by making monthly budgets which can be helpful in finding where things are going wrong. If you start this practice you will know where there is a scope for cutting expenses and you will be able to save more. The excess money or the money saved can also help you in clearing debts if any. Else you can save that money for the rainy day. It is advised that you should keep aside a fund ready every time to cover expenses of at least 6 months.

2) Pay off Loans/Credit Card Debts: You should clear off the debts first, rather than investing money, as usual, your debts cost you more than what you get in reward from the investment. If you have multiple debts, you should clear the debts with a higher rate of interest first as they cost you more than other debts. Credit card debts are the costliest followed by unsecured loans such as short-term loans, personal loans, and then secured loans.

3) Create Financial Discipline: If you start investing, you should maintain discipline in saving. It helps you in having control over your expenditure. Discipline is the key to saving. It is just through discipline that you can save more money indefinite time. It is just your saving habit that makes you rich. If you start saving today, you will be rich tomorrow.

Let’s take an example: Suppose Mr. A and Mr. B are friends of the same age and work in the same office under the same profile/ designation from the same date. Mr. A saves Rs. 1000 per month, while B saves nothing. Now, taking into consideration a notional rate of return on savings, Mr. A will have around Rs. 32,000 over a period of 20 years while B will have no such amount. This will make him richer than Mr. B by Rs. 32,000.

4) Invest: In order to maximize your savings you need to invest them further. Wealth can be built by investment only. You can start it by investing in low risk vehicles for investment and once your base gets stronger you can increase the exposure and invest in investment vehicles with a higher rate of return. Also, you should not invest in only one instrument, as a famous saying goes that one should not put all the eggs in the same basket.

Hence you should diversify your portfolio to minimize risk and play safe. Your investment approach is defined by your risk tolerance level which ultimately depends upon your investment objective. It needs to be noted that low risk features low returns too; however high risk offers you high returns and a huge losses at the same time.

Low-risk investment vehicles include bank deposits, PPF, fixed deposits, and government securities. High-risk investment vehicles include equity, commodities and real estate. There are some avenues that have medium risk involved viz. AAA bonds and balanced mutual funds.

5) SIP: It stands for Systematic Investment Plan. A systematic investment plan is a recurring version of a mutual fund. It features balanced risk with a higher rate of interest and hence is a better way of investing in equity as the risk is hedged with diversification in a portfolio. SIP is maintained by expert wealth managers.

You can never predict life and likewise, it is difficult to anticipate bad times. Therefore, it is very much important to have a basket full of savings. One should save regularly irrespective of the amount.

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