Generally
when we talk about personal finance it is related to investing. However the
biggest question comes how to invest, if we don’t have enough savings? Although
regular savings habit is part of our ancient culture but in current environment,
with rising cost of living, better lifestyle and with consumerism part of our
culture, Saving sufficient amount is
becoming increasingly difficult and challenging. In this post, we will discuss
some golden savings tips that can help us, without compromising in our
lifestyle.
- · Make a monthly budget:
If we sincerely make a monthly budget half
of our job is done regarding controlling the expenses. However we should be
careful while making budget, it should not be a theoretical exercise but based
on all practical needs and not on gut feelling. When we prepare your monthly
budget, it should start with absolutely necessary items, e.g. food, rent,
utility bills, transportation costs, children’s school fees, insurance premium,
home loan EMIs etc. After that we should keep some money aside for emergency
needs. The balance is discretionary spending. We should always try to minimize our
discretionary expenses and maximize the savings. So how can we do that? First
we should take out our monthly bank or credit card statement, and study our
spending habits. We should check each and every items whether it is necessary
or discretionary and eliminate wherever possible. The other option is to set a
savings target and stick to it assiduously.
- · Debt only when desperate:
Loans means spending tomorrow’s income on today’s
expenses so we should avoid debt and take it only for very essential things.
Debt comes in many forms e.g. credit cards, buying expensive electronic
gadgets/ items in equated monthly instalments etc. We should always remember that
debt, in whatever form, have its cost in the form of interest expense. If we
cannot control our buying habits than we should use debit card, instead of
credit card. If we are using credit cards, we should ensure to pay the full
amount due on a monthly basis. Setting up an ECS to pay the full amount due on credit
card on a monthly basis before the due date, will prevent us from incurring
interest expense and late payment fees. We should avoid EMI payment schemes for
purchases the simple logic is if we cannot pay in full, probably we cannot
afford to purchase the product as of now. So we should wait till we have saved
enough to purchase it by paying the full amount or opt for a lesser priced
product. We should not be enticed by promotions like “zero interest” EMIs for
purchase of certain items. There is no such thing as a free lunch. For such
items with zero interest EMIs, we are likely to get a discount if pay upfront
which is similar to interest cost. If we already have debt, it should be paid
in full, before we spend on non-essential items. However there are certain
loans like Home loan which are not bad if taken to buy home for living as in
that case we are buying assets and will also get income tax benefit.
- · Plan before buy:
In earlier days like our parents first
prepare a shopping list, before going for grocery shopping. The shopping list
has a great use, if we are trying to minimize our spending especially when we
are shopping in a supermarket. With a shopping list we shop with a sense of
purpose and only buy items that are really required. On the other hand if we
are shopping without a list, we may end up buying unnecessary items that
catches our fancy, rather than the utility. The ambience and product placements
in supermarkets are designed to make us spend more and feel good about it. For
example, the music in the supermarket often has a slow rhythm. The idea is to
make us walk leisurely, so that our wandering eye can catch some attractively
packaged stuff that most probably we do not need. Smart product placement often
makes us spend more. Generally the most expensive brands are kept at the eye
level and the less expensive brands are kept in the upper or lower shelves.
Naturally the most expensive brands will first catch our attention and make us
buy it. Many supermarkets have consumer durables next to fruits and vegetables.
Although, it does not make logical sense but there is a science behind the
product placement. The bright colours of fruits and vegetables serve to
brighten up our mood. The happier we are, the more we are likely to spend on a
consumer durable item that we may do not need. On the contrary If we have a
shopping list, we will buy only those items that are required and leave.
- · Wait before buying:
When it comes to buying gadgets like TV,
Laptops, smart phones, tablets etc very often we want to buy the latest model.
But we should also remember that latest model is often the most expensive one
too. First we should ask our self, do we really need the latest model. If we
can afford to wait for few months, we may get the same model at significant
discount. However, I do realize that it is easier said than done. When it comes
to electronic gadgets, people are led by “herd mentality”. We should, however,
remember that smart savers are never influenced by what their peer group is
doing, because most people in the peer group are not smart savers.
- · Shop Smartly:
In the current age of internet and
ecommerce online shopping could be a smart and time and money saving. Online
shopping cheaper because real estate cost of brick and mortar stores are
getting expensive by the day, especially in big cities. Online retailers buy
their merchandise directly from the source, instead of going through
intermediaries. Some online retailers are well funded by venture capitalists.
They can afford to adopt predatory loss pricing to capture the target customer
segment. Online retailing is picking up in India at an accelerated pace.
However, some customers are worried about quality, reliability and customer
service issues. Some shoppers like to touch and feel the product before buying.
You can visit a brick and mortar store to get a closer feel of the product. But
you can always order it online and save costs. We can follow some simple tips
to make the online shopping safe and enjoyable experience.
o
We should shop in a trusted familiar and
well known online sites. Searching for a product on Google may throw up very
enticing offers, but we cannot be sure about the trustworthiness of many
websites. On the other hand if you shop from well-known online sites likelihood
of things going wrong is quite less.
o
Before purchasing we should always compare
prices of the same item on different websites so as to get the best deal.
Different online shopping sites run different promotions and there are chances that
we can get a better deal if we explore multiple options
o
Shipping charges could be a hidden cost and
we should check it before placing the order. Otherwise, we may be hit with a
nasty surprise when at the time of final bill.
o
Always check for security of website for
making online payment through credit card we can check it through SSL
encryption which is depicted by the icon of a padlock on the address bar.
o
We should fill out only the mandatory
personal information, when making an online purchase. There is no use in
filling out non-essential personal information like date of birth, spouse’s
names etc. which can actually be misused by cyber thieves.
o
We should always use strong passwords, with
combinations of upper case and lower case, numbers and symbols.
o
When on the move, we can use mobile apps
for online shopping through our mobile phone. This will ensure online shopping
on mobile a more efficient experience.
- · Savings through liquid funds:
Generally most of us keep funds in our
savings bank that we will not need in the next few weeks or even months. Liquid
funds are an excellent destination to park those funds. Liquid funds are better
alternative to savings bank. While having an emergency fund parked in savings
bank is essential from a financial planning perspective, if we can wait for a
day to withdraw the funds, liquid funds are an excellent alternative to savings
bank account. While savings bank interest is usually around 4%, liquid funds
provide almost double returns in the range of 7.5-8.5%. This extra income is
very useful from a long term perspective, because we can re-invest it in high
yielding assets like equities and earn higher returns over a long time horizon.
While liquid funds are subject to market risks, the nature underlying
instruments in a liquid fund ensures a very high degree of safety. Withdrawals
from liquid funds are processed within 24 hours on business days. Some liquid
funds offer cash withdrawal facilities with ATM cards.
- · Start investing Regularly & Systematically:
In
hindi there is a saying “ bund bund se ghara bharta hai”. Saving
regularly is the best and easiest way for long term wealth creation. If we opt
for systematic investing on predetermined dates directly through our bank
accounts, It forces us to save more, by leaving a smaller surplus in our bank
for discretionary spending. After a careful analysis of our regular expenses, we
should prepare our monthly budget as discussed earlier and set a savings
target. Based on this savings target, we should start a monthly systematic
investing plan and set up an ECS with our bank account at the start of every
month. That way we will prioritize long term investment over discretionary
spending. With a systematic investment plan over a long time horizon we will
benefit from the power of compounding of our investment returns and create
wealth. The table below shows a scenario analysis of the corpus built over various
periods of time at different investment return rates, with a monthly SIP amount
of 5000/-
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