Introduction
'Penny saved is penny earned' goes the old saying and the suggestion still holds water. Even this earn-and-burn generation understands the importance of savings. In fact, financial experts say that saving is a more important player than income and return from investments on the budgeting pitch. From dealing with emergencies to getting ready for a life post-retirement, savings help in securing an uncertain future, financially.
Why you need to save?
From buying a home or car to meeting the expenses of a major ailment and to being financially independent after retirement, savings are done for various reasons. How much you need to save and how soon depends on your specific requirement? That is why goal-setting is an important aspect of fulfilling your objective. These goals can be both short-term and long-term depending upon your need's urgency and importance. It varies from person to person and also from year to year.
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Short term goals: These are easier to achieve as the amount of capital required to execute them is less. For instance, saving for a foreign trip would require something around a couple of lakhs but the amount can be easily saved in a year or two. With the target in sight, you will be more willing to let go some expenses like regular dine-outs or movie outings for the sake of the big holiday. Mid-term goals include getting debt-free or buying a flat or car. They can take up to a decade. To fulfill these goals, you need a great deal of planning as well as patience.
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Long term goals: These include the goals for which you have to save from the word go. These goals are largely aimed at achieving financial independence. It can take over two or three decades to create that pool of financial resource that can sustain your years without income or provide you a financial cushion during major emergencies. These include saving for:
Retirement: Gone are the days when the age of retirement was 60. The millennials want to retire early, some as soon as at the age of 40-45. Saving for retirement is a long term goal. The savings will help you lead a comfortable life when you no longer have to go for a job. How much you need to save depends upon the circumstances. For example, a 21-year-old who is just starting out can save a lower percentage of the income than a 42-year-old who has fewer years left before he/she hangs up his/her boots. Experts suggest that the traditional recommendation of saving 15-20 percent of the income can prove to be low to guarantee a comfortable retirement and that 25-30 percent is a much safer bet.
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Emergencies: One must save for an "Emergency Fund" or “Rainy Day Fund”, which is nothing but a contingency plan. It requires you to save a little from time to time, which can help you wade through the troubled waters and can cover around 3-9 months of your living expenses. You need to calculate your monthly cost-of-living minus the luxuries. In case you lose your job or any other emergency situation arises, this six-month emergency fund that might have taken 12-18 months to build will come to your aid.
Calculating the right savings amount
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Prepare a budget: A budget needs to be prepared after analyzing about three to six months of expenses. The idea behind the making of the budget is to do self-assessment of income and expenditure. Managing a budget can be quite messy and stressing, but nowadays, there are budgeting apps that can help you in keeping an eye on your expenses. These apps also can be linked to your bank accounts so they can pick the amount automatically for calculation.
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Evaluate your spending pattern: The next step is observing your spending patterns. The foundation of budgeting lies in tracking your spending and then developing strategies to control it. Organizing your spending into categories will show you exactly where your money is being spent and give you an idea where you have to make adjustments. While some expenses like EMIs, monthly bills, rent, health insurance are non-negotiable, others like buying groceries and utilities are variables. In the latter, you can always save some money by buying them from a place that offers discounts. However, the bulk of saving can be done in the category of leisure which includes trips, eating out, movies, spa etc. It can be even brought down to less than half without hurting the basic standard of living.
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Set realistic saving goals: While settings goals are important, achieving them is far more necessary. But you cannot become a saver overnight if you haven’t been one. So, you need to create a reasonable and realistic plan to reach your goal. Start with what’s doable – saving 5 percent of the income monthly and then progress towards achieving 10 and 20 and 30 percent. Remember, as the income increases, the savings increase too. The idea is not to push too hard and also not to set goals that are easily achieved.
While keeping the focus on saving more, one should not forget the importance of earning more as the time goes by to deal with rising cost of living. Budgeting is a lot like being on a diet. Initially, it appears difficult but setting smaller goals and achieving them can give you confidence. Similarly, the longer goals can be met with steady progress. Budgeting is a lot about how mentally tuned we are. It becomes a part of our nature gradually and courtesy that, ultimately, we will be the one reaping the rewards of an improved financial condition.
