“Savings”: To put it in simple words, savings is a process of keeping aside a part of one’s hard earned money to satisfy future needs; be it buying a luxury car, buying a big house, investing in any kind of assets, retirement purposes or anything at all.
When we are young, we fail to understand the true value of money. We keep wondering about how our friends could spend so much on buying new clothes and expensive toys. Perhaps, that triggers the habit of savings in us. Generally speaking, it is only after spending extravagantly for almost one or two decades on this planet we start understanding the real value of money and significance of savings. But by then, the sand has already slipped from our hands.
Importance of savings
- Education: Education is the basic and most important necessity of every individual. The rising costs of public and private education is no more a hidden story.
- Layoff: Companies like Cognizant, TCS, GM, Wipro, Infosys and many more are apparently planning for job cuts in near future.
- Retirement: At younger stages of our lives we really do not understand the importance of savings for life after retirement. But think once you will need funds/income/investments to support your financial status.
- Emergency health care: If we need an urgent check-up or treatment for any health related problem and we do not possess any kind savings this may force us to take loans, or end up compromising with our health issues.
- Emergency cushion: This can be anything: A sudden loss, an urgent renovation, an accident or anything. We will need money to avoid going under some serious debts.
Now the question is “How should we save?”
Saving money for youngsters is much easier as compared to older population and the major reason for this is no big debts/obligations. There are two things that we should think of before making a savings plan:
- Can we reduce or eliminate any variable expenses?
- Can we shift the money flow towards savings, which previously was applied towards un-necessary expenses?
- Savings Account: Savings account is the most common technique for most of the youngsters to save a part of income. A savings account keeps money safely and provides convenient access to it. There are various types of savings bank accounts in India to meet everyone’s need.
- Do not carry a lot of cash: We spend on un-necessary things impulsively when we have got lots of cash with us.
- Assess Spending: Try to figure out a proper guess of the amount of money you spend in a period (week, month, and year) and the difference.
- Use coupons: These savings make a small difference but the fact is it does. In fact, coupons play a small yet important role in reducing day to day expenses.
- Mutual funds: Mutual funds provide investors with great diversification across all the possible sectors and among great variety of stocks, listed in the stock market. Diversification can also be done between major asset classes like equity, debt and even in gold. This automatically reduces the risk of investment and gives investors a great value to their money as they compound with higher frequency and quantum.
- Try this one “buy nothing period”: Decide a particular period of time every month or year in which do not spend on buying anything.
- Opportunity cost for purchases: When we talk about investments, one of important aspects is compound growth. If you are ready to hold for a longer period, it is even better for you. If you start investing earlier in life you will obviously have to let it grow for a longer period. Power of interest and investments can help you save double or triple in just one decade.
Investments: Investments plays a vital role to keep up even with inflation. Investing can earn or lose your money but if made wise choices it can be a great pillar for savings. Investing in stock markets and mutual funds can compound both with higher frequency and in higher quantum. Compounding is a phenomenon that tells you how vital it is to start saving right away to have fulfilled our future goals. It can help us grow our wealth exponentially. If we want compounding to work harder in our favor there are two things that can surely help us to do that:
Putting the savings to work:
Compounding follows the simple principle of reinvesting your interest earnings along with the principal. It is governed by two factors:
- Frequency of compounding
- Period of investment
While the first factor depends on the quality of the investment destination we choose and the decisions we take, the second factor is something that can be certainly helped. The following example clearly illustrates it:
- Suppose A invests $5,000 every year from the age of 25 years of age. He has invested till the age of 65 at a 6% p.a. rate of interest and the resultant amount is $773,809.83.
- B also invests the same $5,000 at the same rate of interest but begins at 35 years of age. He has invested till the age of 65 years and the result amount was $395,290.93 almost half of what A was able to achieve.
Here rate of interest is 6% and the amount invested was $5000. Compounding period for A is 10+30 years whereas for B the investment period was only 30 years.
Now we can see in the given chart, how investments return back with high returns if done well in time. So, please spend and save with rationality and retire comfortably.
We are all aware of the famous saying, “Early bird catches the worm”. It reminds us to act early or right away to be successful. Mutual fund is the starting point for most of young investors because they provide a balanced portfolio in a single investment. Therefore, keep your finances right, invest in healthy stocks and mutual funds and enjoy the reward of compounding. If we have a look at present financial distribution system, it is strongly believed that Mutual Fund Investment can be helpful for most of the investors. The stock market has returned over 15% in the past 35 years, and mutual funds might closely follow. So, it is now only a matter of choice whether you want your net worth to fly off the charts, albeit cautiously and wisely.
Credits: Prateek Kadyan| PGDM- Marketing | Content writer: Svobodha