Savings and Investments
Introduction
As a child, you have always been told the importance of saving money and being financially responsible. A piggy bank was given to you to help you understand why you need money, how to save for something you want to buy, long-term and short-term goals, and how to avoid spending all the money you have.
The same rules apply for grown-ups too. One of the most important things you can do for your financial wellbeing is to get in the habit of saving. It cushions you from emergency events that may require large and urgent expenses: financing a college education, a home purchase, or your retirement.
How to start?
Saving does not mean miserly behaviour. You don't have to stop having fun or cramp your lifestyle. All it requires is a balance. It's actually very simple — look at what you earn and then look at where you would like your money to be spent. Here's what you can do:
- Track your expenses by writing down all that you spend in cash and credit cards. You will be surprised at the amount of random purchases you make — extra groceries, coffee breaks, etc. Add it all up and you will know where to start trimming.
- Next, set a budget. This helps you create a plan for spending by tracking your expenses and accordingly setting a savings goal. Your spending list should be as detailed as possible; try not to omit small purchases. Assign each purchase or expenditure a category such as rent, car insurance, phone bill, cable bill, food, entertainment, etc. Then, fix limits on items such as clothing, groceries, entertainment, and travel.
- Set a savings goal. For short-term goals, this is easy. If you want to buy an appliance or gadget, find out how much it costs. If you want to buy a house, determine how much of a down payment you will need. But for long-term goals, such as retirement, you have to do a lot more planning. Figure out how much money you will need to live comfortable for 20-30 years after you stop working, and also assess how much your investments will help you achieve your goal.
- Pay off your debts, as this is the fastest way to free-up money. Once your debt is paid off, it can easily be re-purposed to savings. Plus, the sooner you pay off the debt, the lesser the interest you pay.
- Saving should be a priority. Don't just say that you will save whatever is left over at the end of the month. Deposit savings into an account as soon as you receive your pay-cheque or have the amount deducted from your salary every month and put it into a fixed or recurring deposit.
How much to save?
So, how much should you build up and set aside? The right amount will depend on:
- What are your financial responsibilities? If you are the head of a household or have dependants, you'll want a larger cushion.
- What expenses do you anticipate in the years ahead? If your list is long, you will need a larger savings.
- How regular is your income? If you are self-employed or have a fluctuating income, you may need a bigger savings.
Once you start building this emergency fund, make sure that it is not placed at risk and can be accessed easily.
Saving Vs investment
Though it may seem like there is little distinction between savings and investment, the two are independent processes that you shouldn't get confused with. Saving is the process of keeping aside money and parking it in a safe and easily accessible security or account. This includes savings accounts or short-term certificates of deposit. The key element is to avoid risk, at all costs.
Investment is the process of using money to buy an asset that will generate a safe return over time, increasing you net-worth with each passing year. An investment involves risk and includes real estate, fine art, gold coins, stocks, mutual fund, etc. Good investments are the soundest ways of growing wealthy.
How much to save and how much to invest?
Saving always comes first. Think of it as the foundation upon which your financial house is built. It is your savings that will provide you with the capital to feed your investments.
Your savings programme should cover:
- All your personal expenses including your loan payments, insurance costs, utility bills, food, and clothing expenses for at least six months, so that you are prepared in case of an emergency;
- Any specific goal in your life that will require a large amount of cash, such as a college education or purchasing a home;
- A health insurance.
It's only after these things are in place that you can begin investing.
Systematic Investment Plan (SIP)
The Systematic Investment Plan (SIP) is a regular saving scheme like a recurring deposit. It is a simple investment strategy to accumulate wealth in a disciplined manner over a long period of time. Under this plan, a specific amount is invested in a mutual fund for a continuous period at regular intervals. As an investor, you can buy units on a given date every month; you decide the amount and the mutual fund scheme. Investing regularly through Systematic Investment Plans (SIP), even if in small amounts, brings you many benefits. These plans secure your future; by starting early in your life, you can be assured of a fixed monthly income after your retirement.
Today, there are numerous savings investment plans offered by leading financial institutions. In case of traditional plans, the insurance company takes all the investment decisions on your behalf over the entire policy term. Here, your return on the policy is in the form of a bonus payable on maturity. You can also opt for a unit-linked plan where you can regularly monitor and review your investment decision according to your needs. Here, you decide on the choice of investment and the risk is in your control. There return is in the form of growth in the Net Asset Value. We, at MoneyRaksha, help you choose a SIP that gives you the best guaranteed returns on your investment.