Money has always been the biggest motivator for me growing up. I always wanted to be the financially independent self that I now am. I thought getting a job and making a steady pay check would suffice. But reality hit me hard when I came face to face with inflation, rising costs, paying bills, saving for the future, enjoying the present and everything in between.
I soon realized that salary was not enough. Also getting meagre to no increment at work year on year meant I had less and less money to spend every year thanks to rising cost everywhere.
This led me to the realization that it is very important for me to save and grow my money as soon as possible so that my money keeps growing in spite of the rising costs and lack of increment each year. The challenge I faced at this point is knowing where and how to start. I took my own time to research and find the best possible instruments which could help me save taxes and grow my money.
So if you are just getting started and want low risk methods of saving and investing money in the Indian market, then read on. Your future self will thank you.
Table of Content:
Why should you save money?
Before getting to the how and where, I always like to elaborate with the “Why”. Saving money does not come naturally to most people is what I understand. I am unlike those people and it actually amazes and scares me a little how people don’t think about their future self when it comes to money.
Let’s say you earn a really big pay check each month, and you spend it all on your bills and entertainment expenses and leave none for your future. Also let’s assume you have no family responsibility and have a pretty stable job which is guaranteed until you retire. But there will definitely come a point in your life where you will HAVE to retire, be it because of your retirement age or some unforeseen situations. At that point, how do you think you will be afford the lifestyle that you were leading?
Now edit the above situation with the current unstable job market, and huge family responsibilities with kids and aging parents. If you happen to rely on only the income that is coming in each month, you are one accident or layoff away from being broke and bringing your entire family down with you.
My advise to anyone starting out is to not care about how much one is able to save each month. It could be just 5% of your whole pay check and that would be enough. The first couple of years is to build resilience to saving and getting motivated by seeing the money grow. After this point saving and investing money will become second nature.
How much should one save?
As mentioned earlier, it does not matter. What matters in the beginning is to get started. If you’ve never saved any money, then just starting with Rs. 500 each month is going to be a huge momentum. That alone is equivalent to Rs. 6000 a year.
However, I personally suggest saving in percentage of salary. To start, saving at least 20% of the paycheck is a very good amount. Saving a percent of the income ensures that if there is an increase in salary or the income is variable each month, then the amount saved also can be proportionally increased or decreased.
As a beginner to money management, I would always recommend the 50-30-20 method, where 50% is the amount spent on needs, 30% is the amount spent on wants, and 20% is the amount saved for the future. This is a very conservative and easy approach to begin with. But I would always recommend tweaking it in the future and saving more while spending less.
What are the Saving Buckets?
Now we understand that we are saving for the future. But we also need to know what are the various categories that we need to save towards. Let me break them down below:
Emergency Fund
This is the first thing we should save for. At least 3-6 months of your “Needs” expenses should be your emergency fund. This fund should be invested in a low risk and high liquidity asset for easy access. This gives a very comfortable runway of 3-6 months to get back on track in cases of emergencies. This fund also needs to be assessed every 2-3 years and topped up to account for the change in lifestyle and larger living expenses if any.
To get started I would suggest starting a Recurring Deposit (RD) in the bank with the 20% of the income for a period of time till it takes to collect 3-6 months of salary. This is going to be the longest waiting time, but it will be worth it. To expediate the process, make sure you contribute any extra income generated into the Emergency Fund.
Once you reach your goal Emergency Fund amount, save it in Fixed Deposits (FD) in the bank. Depending on the amount you can decide on how many FD’s you will require. I suggest breaking down the whole emergency fund into smaller amount FDs, so that when required only one of the FD’s needs to be broken.
FD’s do not give a huge return, but they are safe and guaranteed. It is not advisable to keep the emergency fund amount as cash, but a nominal amount can be kept at home too.
Long Term Fund
In my definition, long term fund is any fund that you are saving for your far future self like retirement or old age. This is a fund that you need protected as well as guaranteed. Government schemes are best for these kinds of savings which gives a guaranteed high interest returns and in some cases are also tax free.
You can invest in Public Provident Fund (PPF) where you deposit money each month/year and at the end of 15th year you are able to withdraw the amount with a high interest and is also tax free. PPF is different from the Provident Fund (PF) which is maintained by the employer if one is employed. If you have accounts with both PF and PPF, you will be able to get the dual benefits from both accounts. You can also save in National Savings Certificates issued across post offices for a tenure of 5 years.
Other investments for long term would be in Index Funds which are passively managed mutual funds or ETF’s like Nifty 50 or S&P 500. These have a good return with low risk when invested for a long duration.
Sinking Fund
Another very important bucket to save and invest for is the sinking fund. This is basically any amount that you know you will be utilizing in the next 1-2 years. It could be anything like a gadget upgrade, home renovations or travel plans. These big purchases need to be planned in advance, and you should start saving an amount for it as soon as possible. That way when the time comes to pay for the purchase, it will not shake up your budget.
For example, if you plan to upgrade your phone next year, then you should start saving for it at least a year in advance. Let’s assume you want to purchase the latest iPhone that is to be released next year and based on research you find out that it would cost at least 1.5 lacs. In that case, I would start a monthly Recurring Deposit (RD) in the bank for 12,500 per month. At the end of 12 months, you will not only have saved up the amount for a new iPhone but also earned a little bit of interest.
Insurance Fund
Another important bucket to save up for is your health and life insurances. It is very important to be insured and up to date on paying the premium each year. The best way to save up for the insurance premium each month is by creating a Recurring Deposit (RD) in the bank.
Calculate how much monthly contribution would be required to save up for the annual premium amount and create an RD for that amount. Make sure to time your RD in such a way that it syncs with the time for your annual premium payment. That way when the time comes, your RD will mature, and you can pay the premium amount without any hassle. Your monthly budget will stay intact.
Final Words
As you may have read above, I am very inclined towards saving via Recurring Deposits and Fixed Deposits in the bank. These instruments are very beginner friendly and help you get started on the journey to a brighter financial future. I was able to get into the habit of saving and investing via these instruments and once I got comfortable and my risk appetite increased, I started exploring other high-risk instruments like stocks, equity etc.
I am no longer in the beginner phase of savings and investing, yet I still use FDs and RDs as instruments for some of my saving goals and they have helped me reach a lot of financial milestones in my life.
The best time to start saving and investing was yesterday, and the next best time is NOW. My strong advice will be to get started as soon as possible and do not wait for the right time. All the best!