Savings is the portion of income not spent on current expenditures. Because a person does not know what will happen in the future, money should be saved to pay for unexpected events or emergencies. For example, an individual’s car may break down, their dishwasher could begin to leak, or a medical emergency could occur. Without savings, unexpected events can become enormous financial burdens. Therefore, savings helps an individual or family become financially secure.
The saved money could also be used to purchase expensive items that are too costly to buy with monthly income. For example, buying a new electronic device, purchasing an automobile, or paying for a vacation can all be accomplished by saving a portion of your income.
How much saving should be done?
Considering an unexpected time may come at any time, a person must be financially secured. A desired amount of saving could be one to two years of expenses. For example, a home with Rs 50,000 per month in expenditures should have at least Rs 6 Lakhs in savings (Rs 50,000*24 months). Further, some additional amount should be saved for unexpected medical emergencies. This desired saving should be adjusted per the running inflation rate and changing life situations,
To reach this amount, it is recommended that 10- 20% of net income should be saved until the desired amount of savings is done. Net income is the amount of an individual’s take-home pay after taxes and other deductions have been taken out of a paycheck.
A Broader Approach While Saving
You must develop a budget using your net income to reflect your take-home pay after taxes and deductions. People make a common mistake by creating an allocation for their gross income. It’s a mistake because you’re budgeting the money you never possessed. Remember that your potential saving is the difference between your net income and expenses.
When developing a saving plan, ask yourself these questions:
- Are there any variable expenses that you can reduce or eliminate?
- Is there anything you spend money on that you could stop and put towards saving?
Savings and Compound Interest
When people think of interest, they often think of debt. But interest can work in your favor when you’re earning it on the money you’ve saved and invested.
Compound interest can be defined as interest calculated on the initial principal and the accumulated interest of previous periods. Think of it as the cycle of earning “interest on interest,” which can cause wealth to snowball rapidly. Compound Interest will make a deposit or loan grow faster than simple interest.
Not only would you get an interest amount on your initial deposit, but you will also get interest money on the previously accumulated interest. Because of this, your money will grow exponentially through compound interest, which makes the idea of compounding returns like putting your money to work.
Importance of Saving
Saving money could help you become financially secure. It also provides a safety net in case of an emergency. Here are a few reasons to save money:-
- Emergency Situation: This could be anything like house repairs, medical expenses, or a sudden loss of income. You would need to set aside some money regularly so that these emergencies do not put you in debt.
- Education: Education cost is rising every year at every level. Be it primary education or secondary education, or higher education. At times it becomes challenging to meet the rising education costs. It is also important to note that education costs are necessary and can’t be avoided.
- Insufficient Government Support: Social Security or government support has never been sufficient or couldn’t be considered a primary source of income. Without savings and investments, you put yourself and your family at risk. For example, insufficient money to pay for emergency medical expenses could force you to take a loan. It may adversely affect your finances.
- Retirement: After your retirement, you would need some regular income. If you don’t get a pension or annuity from financial products, in that scenario, you would need savings and investments that can replace the income you would no longer get after retirement.
- Average Life Expectancy: With more advances in medicine and public health, people are now living longer. People would need more money to live a longer and more comfortable life.
Tips and Tricks to Spend Less and Save More
Saving is a habit that is hard to form and maintain. It takes discipline and determination to save money. Some of the valuable tips for saving more money and a list of ways to spend less are: –
- Save Windfall Gain: Any unexpected money such as an income tax refund or prize money won from a game or lottery could be saved instead of spending it.
- Adopt Frugality: Avoid purchasing very costly brand items and save money.
- Break a Habit: Try doing one less thing from your expensive lifestyle and apply that money to your savings.
- Outside Food: According to some surveys, an average family spends 5-10% of monthly expenses on outside food. Try reducing this expenditure and investing.
- Compare Costs: Make comparisons before making significant purchases.
- Use Coupons: Gift and discount coupons are a great way to reduce expenses. Vouchers are now offered by most online shopping sites and physical stores.
- Follow the “buy nothing in a week” concept.
Conclusion: Start Using a Savings Account Today to Supercharge Your Finances
The most important thing to remember is that you should start using a savings account today. It is the first step in building financial security and wealth.
You can use a savings account for a variety of reasons. For example, it can be used for emergency funds, retirement, or any savings goal. In addition, the amount saved could later be used for investing so that you are not left out when the market turns, and your investments become worth more than they are today.
