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, 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. The trigger to save is often late and only a form of regret in the lives of most people. But by then, the sand has already slipped from one’s 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.
Layoffs: Companies like Cognizant, TCS, GM, Wipro, Infosys and many more are apparently planning to cut jobs the 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.
Contingency fund: This must cover any unforeseen expenditure: A sudden material loss, an urgent renovation, an accident or anything. This must make sure that you do not get into any serious debts desperately.
Though very basic and simple in nature, it is helpful to understand how we can save money. 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 while planning to save:
Can we reduce or eliminate any variable expenses?
Can we shift the money flow towards savings, which previously was applied towards unnecessary 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 unnecessary things impulsively when we carry extra cash with us.
Assess Spending: Try to estimate and restrict to an amount of money you spend in a period (week, month, and year) by simply comparing it to the past and trying to improve.
Smart savings: 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. With the advent of several coupons and discount sites, this process has become easier and more efficient.
Try this one “buy nothing period”: Decide a period every month or year in which you do not spend anything.
All this still might not be enough to satisfy your future needs. As simply put by Robert G. Allen “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”
Investments: With investments, one of the 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. Investments also play 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 assets like mutual funds can compound wealth in the long term at an unmatched rate. Mutual funds provide investors with great diversification across all the possible sectors and among great variety of companies 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 for their money as they compound with higher frequency and quantum.
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 until the age of 65 at a 6% p.a. the 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 until the age of 65 years and the resulting amount was $395,290.93 almost half of what A was able to achieve.
This is the power of starting early. And since stock markets have returned over 15% in the past 35 years, mutual funds are a good starting point for most of the young investors because they provide a balanced portfolio in a single investment. So, it is now only a matter of choice whether you want your net worth to fly off the charts, albeit cautiously and wisely.