Let Me Encourage You To Save More
Are you fully living the YOLO lifestyle and don’t care about saving any money? Or have you thought about saving money, but haven’t started yet. Don’t worry, I have got you covered.
In this post, you’ll understand why do people save? What are the mains reasons? And that will encourage you start saving more?
Here are five reasons to start saving more.
During Times of Emergency
The biggest reason you should save money is you don’t know what might happen in the future. You must have at least three months worth of your expenses available with you at any point in time. This amount should be instantly and readily available whenever need be.
Now you might ask what is the purpose of having such an amount. You might face some unexpected expense, a medical emergency, or even lose your job. This amount will come handy in such cases.
Even Bill Gates used to have an emergency fund at Microsoft. He insisted on always having enough cash to keep the company alive for 12 months with no revenues coming in. This is what he said:
I was always worried because people who worked for me were older than me and had kids, and I always thought, ‘What if we don’t get paid, will I be able to meet the payroll?’”
— Bill Gates
Read this post by Morgan Housel to understand more about this.
When one of the richest man on the planet wants to be so conservative with his company, and care for his employees’ payrolls, in case the company doesn’t generate any revenue, shouldn’t you have a similar approach?
Savings Rate Matters More Than Income or Returns
You could earn ₹5 lakh a month, but you’d be broke if you spend it all living a lavish lifestyle. On the other hand, you could earn a modest ₹40,000 a month, but you are wealthy if you spend ₹30,000 of it.
You can build wealth without a high income, but have no chance of building wealth without a high savings rate. It’s clear which one matters more.
— Morgan Housel
Many people say that they will save more if their income increases. You must understand that 70% of lottery winners go bankrupt within a few years. It is not your how much you make, but how much you keep that matters.
Another fact that will encourage you is that one-third of millionaires NEVER earned more than $100,000 a year. Yes, a high income might help, but it is not a necessity — your savings rate matters more.
Plan For Specific Goals
Are you planning to buy a house? Do you want to go on a vacation? A new car? Or your retirement? Plan for this in advance and start allocating small amounts of money to these goals. Over time, these goal will look be within your reach.
Say, you want to go for a vacation at the end of the year. And let’s say it costs ₹1,00,000. You would need to save roughly ₹8,000 per month. Now, this amount doesn’t look like a big amount at all.
Let’s take the example of a house. Many people look to buy a house with a loan. The EMI in such cases becomes a very high part of your salary. If you were to take the decision of buying a house, you could delay that by 15-20 years and put that same EMI amount as SIP in index funds. Not only would you have a house, you would also have a decent enough corpus with you.
Controlling Your Time
Think of saving this way. Let’s say your salary is ₹1 lakh a month, and you need just ₹25,000 a month for your day-to-day expenses. The rest are your savings. This means you are saving ₹75,000. In other words, you are buying 3 months worth of your time every month.
Now, this is overly simplified. If you were investing, this would be more than three months. And slowly, steadily, over time, you would have build your corpus to 25 times your annual expenses. That is when you become financially free, and begin controlling your time.
A savings rate of 25% will roughly take 3 decades to reach this stage. If you double the saving rate to 50%, you will reach there in 15 years. A 60% savings rate will help you achieve financial freedom within 11 years. And mind you, all this calculation was done with investment returns of 12%, and income and expenses grow at 6%.
Maintain Lifestyle After Retirement
If you don’t save for your, you won’t have anything when you get there. Yes, I get it that YOLO (You Only Live Once), but there needs to be a balance. It is okay to enjoy your money, but it is not okay to enjoy your money at the cost of your future self.
If you don’t save anything, you’ll have to keep working till you die. That’s a situation you wouldn’t want to be in, right? Do have a look at this short movie which will help you understand the importance of saving for your retirement.
How To Save?
Now that you are convinced about the importance of saving, let’s answer the question of how to develop the habit of saving.
Keep track of your spending.
Simplest way to get better at something is to start tracking it. Once you start tracking all your spending, you’ll begin understanding where do most of your leakages happen, and can fix that. After that, you can begin keeping a budget for each type of your expenses.
Pay credit card bills on time.
If you have a credit card, you should pay whatever is due on the due date. Companies know that it is easier for their customers to keep spending money, so they have something known as minimum amount due. Generally, it is 10% of the total amount due. This means if you pay this amount, you can continue using the credit card and the company will happily charge you 3% interest per month. Pay your credit card bills on time, because it is one of the worst form of debt to have.
Differentiate between wants and needs.
Warren Buffett once said, “If you buy things you don’t need, soon you will have to sell things you need.” There are many things that we buy which we really don’t need. You’ll find many things in your house that you don’t really need. Most of these might be impulse purchases. One way to avoid this is that whenever you feel like buying something, note this down somewhere, and look at this a few days later. This way, you buy it only if you actually need it.
Set saving goals.
Let’s say you want to save ₹1 lakh as an emergency fund, and you want to build this within the next year. You need to save roughly ₹8,000 per month. Setting such goals will force you to save more, and also help you avoid buying things that you might not need. The goals can be anything from saving for retirement to planning for a vacation.
Make it automatic.
You shouldn’t save whatever is left after spending, but spend whatever is left after saving. One way to do that is setting up SIPs as soon as your paycheck hits. This way you would be forced to manage the month with whatever is left. You can also start a small SIP of ₹500 or ₹1000. The amount is so small that you won’t even notice it is gone, but will build up into a decent amount over time. This tip was given by my good friend Niraj Dugar (do check out his blog).
Saving money is not helps you secure your finances, but also helps you get back your time. You also understood 5 ways which will help you start saving more. I hope this post encourages you to start saving.
Till Next Time.