Planning before saving: How to get more from your income

Increase income and reduce expenses, say financial planning experts

The Reserve Bank of India (RBI) reported this week that India's household savings have fallen to a decadal low of 5.1 per cent in Financial Year 2023 (FY23) due to rising inflation. From 11.5 per cent in FY21 to 7.2 per cent in FY22, household net financial assets have consistently declined. The primary cause of decreasing savings and increased borrowing is likely the combination of stagnant or declining household incomes in the face of rising inflation.

A Bhartii (name changed), 42, is a marketing manager for an electric vehicle station startup in South Mumbai. "Our household income hasn't increased, while inflation has affected our budget substantially. We are dealing with a substantial blow to the daily household budget. Tomato prices are red hot. The price of sliced white bread has increased by Rs 2 to Rs 8 per loaf owing to the soaring costs of maida. School fees have increased," says Bharti.

Then there's the impact of Covid-19. "There's no significant growth in real income while the expenses have increased due to higher inflation, especially in healthcare and education. Falling or stagnant income and increased cost of living resulted in reduced savings. Also, many times, the increased cost is paid through borrowing/loans at higher interest rates," says Jigar Patel, member, Association of Registered Investment Advisors (ARIA).

Saving strategy

The strategy to increase savings is simple: Increase income and reduce expenses.

The first step to improve savings starts with your salary. "By restructuring the salary, an employee can save a considerable amount on Income Tax. Requesting the same from your employer is a good idea," says M Barve, founder, MB Wealth Financial Solutions.

By choosing tax-efficient components, employees can restructure their salaries. "Although restructuring one's salary may not maximise one's take-home pay, it will minimize one's tax liability and indirectly increase savings. So check with your chartered account your current salary slip and ask him for suggestions, then approach your employer with the same," says Barve.

"Saving before spending is the golden rule of personal finance," says Vijay Kuppa, chief executive officer (CEO) of InCred Money.

Instead of using the equation of income - expense = savings, flip it on its head. Barve says, "Use the equation income - savings = expenses. Decide how much you want to save in advance, and then plan your expenses accordingly." 

Budget smartly

Once you've decided that savings are a priority, it's time to review the budget. Budgeting can help you make more informed and inflation-friendly decisions as costs rise. Even though you probably cannot reduce the cost of your rent, loan instalments, or tomatoes, you might trim your subscriptions or entertainment budget. "Continue to track your spending regularly, and use budgeting apps or tools if required to ensure you stay within your budgetary limits," says Adhil Shetty, CEO of Bankbazaar.

One way to save money is by using the auto pay facility of banks. "Set up automatic transfers from your salary account to a dedicated savings or investment account. This approach ensures that a portion of your income goes directly into savings before you have a chance to spend it," says Adhil Shetty, CEO of Bankbazaar.

But don't just save. "Money loses its value due to inflation if it’s kept idle. Make an investment plan according to your goals and risk appetite. This will help you to grow your savings," Kuppa says.

A diversified portfolio with investments across asset classes like equity, debt, and real estate would give you a good risk-adjusted return. For people in their twenties, Col. Sanjeev Govila (retired), CEO of Hum Fauji Initiatives, a financial planning firm, has this advice. "Since they have a longer investment horizon, suggest considering higher-risk investments like equities to potentially earn higher returns," he says 

Break down long-term goals into smaller, manageable milestones. Shetty says, "This makes the process more attainable and allows you to celebrate your progress along the way. Use separate savings accounts or sub-accounts for different goals to help you visualise and track your progress more effectively." 

Don't eat your future greens 

Stitch your purse of holes, by paying a little extra towards the debt. "Debt and the interest on it reduces your savings. Focus on paying back debt as quickly as possible," says Kuppa.

It is okay to borrow for creating assets but not for consumption or buying depreciating assets like cars or electronic gadgets. Kuppa adds, "When you receive a raise in your income, resist the temptation to immediately increase your spending. Instead, allocate the extra income to investment or debt repayment." 

For senior citizens, Goliva says, "A reverse mortgage can allow you to tap into the equity in your home without having to sell it. This can be a good option if you need extra money to cover your living expenses."

There are small things you can do to save money: From collecting loose change to packing your lunch instead of eating out. Use the “two-week rule.” To avoid impulse buying, wait two weeks before making a major purchase.

"Invest in yourself. Use your savings to invest in your education or career. This will help you earn more money in the future, which will allow you to save even more," says Govila.

If possible, try to increase your income by getting a part-time job, or asking for a raise at work. "If you're unsure about the best ways to save and invest, consider consulting a financial advisor. They can provide personalized guidance based on your goals and risk tolerance," says Kuppa.