 "Increase your savings as your income rises")
We have all heard stories of our parents or grandparents putting away money in tins, envelopes and savings accounts. Indians are known to be big savers. That is one of the reasons why the 2008 global recession did not affect us as much as it did people in Western countries. Savings have more or less worked as a great way of safeguarding one's future, until now. With the increasing cost of living, the old methods of saving seem to be falling short of our expectations. Are we letting our standard of living eat away our retirement money? This is one question every person faces sooner or later in life.
As a thumb rule most of us keep a certain amount of our income aside as savings. This is usually between 10 to 50 per cent of the earnings depending on the lifestyle. We assume that if we start saving in our twenties we will have a sufficient amount saved by retirement. However, by the time we near retirement our standards of living are so high that the saved amount seems inadequate.
It is a fact that people who save and invest regularly are better off than those who do not. But merely saving is not enough. One should increase one's savings with proportionate increases in salary.
After living a certain way during one's working life, no one wants to cut down on the lifestyle, especially after retirement, when one should be enjoying it the most.
Put the extra money to good use:
Every time we get a hike in our salary we start expecting more out of life. We suddenly shift our focus to our 'wants'. We tend to become lax with our expenses. Knowing that we are saving a portion of our money gives us a sense of satisfaction.
But just as the increment in salary, savings too need to increase. This will help to take care of the change in lifestyle that the increment may have brought about.
Decide how to spend the increment carefully. It can be either a lumpsum amount or it can be additional monthly savings. You need to ensure that the additional money in your hand is being used for securing a better financial future and not only to upgrade your lifestyle.
Many of us don't realise that in spite of getting a raise in our salaries, we are still putting aside the same amount in savings we used to when we initially started. We spend most or all of the increment on material things. Instead of focusing on what we are saving, we should focus on what we are spending most of our money on. If we take every hike in our income as something we can freely spend, we will end up saving a very small amount of the total money we earn on an annual basis.
To see the exact difference, calculate how much you earn every year and how much of it you are able to save.
Here is an example. Imagine you were saving Rs 5,000 every month from your total income of Rs 50,000. After a year your salary increases by 15 per cent and goes up to Rs 57,500. You are still saving the same amount, that is, Rs 5,000 and the rest is going towards lifestyle expenses. If 10 per cent of the income was what you initially saved, it has now gone down to about 8 per cent because Rs 5,000 now is about 8 per cent of your revised salary. Although, you have more money in hand you are unable to retain it for a better financial future. And if this goes on every year you gradually get into a pattern where it becomes difficult for you to spare any extra cash. And with this pattern going on throughout your life you reach the retirement age feeling unsure how to make ends meet.
Follow these simple rules when you receive an increment and/or bonus:
Although it is hard to save money during the initial stages of your career, allowing yourself to spend just 50 per cent of the raise you get every year can work wonders. Before you start dreaming big, you should have something to back it up with. Personalise your lifestyle in such a way that it creates a balance between what you have and what you intend to have in the future. Anyone who masters this quality will be able to maintain a consistent standard of living, not only while working but even during his/her retirement.
As a thumb rule most of us keep a certain amount of our income aside as savings. This is usually between 10 to 50 per cent of the earnings depending on the lifestyle. We assume that if we start saving in our twenties we will have a sufficient amount saved by retirement. However, by the time we near retirement our standards of living are so high that the saved amount seems inadequate.
It is a fact that people who save and invest regularly are better off than those who do not. But merely saving is not enough. One should increase one's savings with proportionate increases in salary.
After living a certain way during one's working life, no one wants to cut down on the lifestyle, especially after retirement, when one should be enjoying it the most.
Put the extra money to good use:
Every time we get a hike in our salary we start expecting more out of life. We suddenly shift our focus to our 'wants'. We tend to become lax with our expenses. Knowing that we are saving a portion of our money gives us a sense of satisfaction.
But just as the increment in salary, savings too need to increase. This will help to take care of the change in lifestyle that the increment may have brought about.
Decide how to spend the increment carefully. It can be either a lumpsum amount or it can be additional monthly savings. You need to ensure that the additional money in your hand is being used for securing a better financial future and not only to upgrade your lifestyle.
Many of us don't realise that in spite of getting a raise in our salaries, we are still putting aside the same amount in savings we used to when we initially started. We spend most or all of the increment on material things. Instead of focusing on what we are saving, we should focus on what we are spending most of our money on. If we take every hike in our income as something we can freely spend, we will end up saving a very small amount of the total money we earn on an annual basis.
To see the exact difference, calculate how much you earn every year and how much of it you are able to save.
Here is an example. Imagine you were saving Rs 5,000 every month from your total income of Rs 50,000. After a year your salary increases by 15 per cent and goes up to Rs 57,500. You are still saving the same amount, that is, Rs 5,000 and the rest is going towards lifestyle expenses. If 10 per cent of the income was what you initially saved, it has now gone down to about 8 per cent because Rs 5,000 now is about 8 per cent of your revised salary. Although, you have more money in hand you are unable to retain it for a better financial future. And if this goes on every year you gradually get into a pattern where it becomes difficult for you to spare any extra cash. And with this pattern going on throughout your life you reach the retirement age feeling unsure how to make ends meet.
Follow these simple rules when you receive an increment and/or bonus:
- Figure out your savings percentage (not an amount) of your monthly take-home and stick to it. If you emphasise on saving first then spending for expenses, you will build a healthy habit of securing your future
- Track your expenses every year. The rate at which they are going up is the rate at which your savings should grow
- Keep a tab on financial goals and how your savings are helping you achieve them
- Keep a tab on fixed expense and variable expense items. For example: The equated monthly instalment doesn't change unless you want to change it. Household expenses, school fees, domestic staff are all fixed on an annual basis. Eating out, holidays, shopping, festivals expenses can vary based on your focus on 'wants'. You can set a limit to increase in variable expenses. Any increase in salary can be divided proportionately to increase in savings and expenses and subsequently to proportionate increase in fixed and variable expenses
- Understand the power of compounding. Compounding returns can create a huge corpus even if the amount being saved is small but held on for a very long term
- Understand the cost-benefit analysis of using the lumpsum to pre-pay any loan or investing the money for future financial goals.
Although it is hard to save money during the initial stages of your career, allowing yourself to spend just 50 per cent of the raise you get every year can work wonders. Before you start dreaming big, you should have something to back it up with. Personalise your lifestyle in such a way that it creates a balance between what you have and what you intend to have in the future. Anyone who masters this quality will be able to maintain a consistent standard of living, not only while working but even during his/her retirement.
The author is Founder, WealthBeing Advisors