Why should we SAVE MONEY ??

Everyone want to spend money so as to live comfortably and enjoy the life but in this article I want to discuss why should we save. Yes we can think that its very obvious why to save, but still lets find out more the reasons behind savings. Here while talking about saving means saving and investing both.

Normally we all feel that “saving money” is only related to securing your future. The equation for them is

Save money = Lead a better life tomorrow

However there are various other angles we need to think about, and that’s why we are going to discuss this in details. So lets understand it more in details:

1 – Securing our future

The most basic and core objective of saving money is to use it for our future requirements. We save or accumulate the money and use it for your future requirements.

We must know that “One day, our regular income which comes by name of salary will stop coming”

There will come a time when we will be left with 30-35 more years of our life and there won’t be a regular salary coming into your account like it happens today. We need to create a big enough corpus, which helps us to lead a life we desire for next few decades even when there is no regular inflow and which should last till our death.

Few people may think that they can avoid creating their wealth because their kids will take care of them. However it’s up to us to decide if that’s the right approach towards life or not.

Savings and Investing what does it means?

Saving: Saving money is very important. We should save money because if one day suddenly we need money we will have it with us. If we just keep on spending all the money that we get and one day we need money we will not know what to do

Investing: Investing makes our money grow. Just as a plant grows from a seed to a plant. When we keep our money in a savings bank we get interest but if we will invest our money in fixed deposits, shares, mutual funds, public provident funds, etc. our money will grow from a small amount to a big amount faster.

Start saving some money for future

To start with If  someone can’t manage to save enough money, at least he should start saving some money starting from TODAY itself . Let me share with you some numbers on this. If a 30 yrs old person invests Rs 5,000 per month for next 30 yrs consistently, then @13% average return over long term, a total of approx Rs 2.2 crore can be accumulated.

The amount of saving is something depends on person to person and even small amount can also make a big difference in a person’s life. We should remember that Anything is a good start! , may be upgrade later – but at least START RIGHT NOW.

2 – To allow us to do what we love to do

Let’s ask a basic question: Do you love what you do?

It is not just work we are talking here but about pursuing our passion for living or doing full time job in the area which we love to do. What we mean here is that do we have enough time and money to do things we love for few hours each week? Something which we truly want to do other than our regular job work?

·        Do you want to socialize more by throwing a party for your friends, but worried about the cost and affordability?

·        Do you love photography, but those costly lenses seem to be out of your current budget?

·        Do you love travelling to new places, but you are stuck because the home loan EMI needs to be paid first?

·        Are you afraid to tell your boss that you want to go on a month long road trip, with your best friend which was planned years back?

·        Want to go on a weekend trip with your friends, but seems it’s out of the budget!

Yes It’s going to be very tough to really achieve all the points mentioned above, if our bank balance is not sufficient. So what we understand here is that Less money means less power with you to do the things in your own way!

We basically need money or time to pursue our hobbies and both of these will come only when we focus on creating wealth.

There is a famous saying that “ Making Money is a hobby that will compliment any other hobbies we have, beautifully.”

If we are so much dependent on our monthly pay checks, it’s going to be very suffocating going forward. Enough wealth in a person’s kitty gives him that power to do things he loves.

3 – To enjoy and live a better lifestyle

There are many thing which don’t need money lie A great nap, a conversation with a good friend, a simple meal with your loved ones. However we should remember that this a materialistic world and we need money to do a lot of things in life.

Yes, I am talking about those materialistic things.

·        A beutifull house

·        A luxry Car

·        Dining in a famous restaurant

·        Partying with friends

·        Buying the I Phone

·        Going on an exotic trip

·        Redesigning your house

We need to spend money on various experience and possessions, only if we actually have the money at the first place (not always, but most of the times). We can be able to do it only if we have money saved at the first place.

While some one can argue that we can always take a personal loan and upgrade our car or go on that vacation etc. However we are talking about the way we do not increase our burden and tension but to enjoy without the tension which comes with the loans.

So lets understand first that What kind of life are we looking forward in coming times? Is our wealth enough to lead us there? Are we doing enough for that?

4 – To have financial independency

Financial independence means when we don’t need to work for earning money.

While retirement is linked to age (which is generally around 60) , the financial independence is a function of wealth and not our age. Financial independence can happen even at the age of 35 or some may be not even independent at the age of 60.

Financial Independence is also referred as financial freedom : Where our passive income equals our desired lifestyle expenses”

For a normal investor, financial independence can happen only when we start our wealth creation journey well in the start of working life and are disciplined enough not to disturb it for long time.

Millions of people go to their jobs in the morning with different moods depending on the day. They are happiest on Friday and very sad on Sunday night. We need to seriously start investing for the goal of financial independence if this is the case with us.

We should reduce our dependency on our active income (salary) as we move from age 30s to age 40s . We should have created enough wealth in the first 10-15 yrs of our working life that some part of our expenses can be met by passive income which our wealth can generate if things go wrong.

It does not mean that we should create wealth stop working and start living on the passive income right away, but we need to create that situation for so that It will bring peace of mind.

5 – To have tension free mind

Not have enough money brings a lot of tension. If we need peace of mind, we need enough wealth on our side which can give us comfort. If we do not have enough wealth we will keep worrying about future every now and then and every small financial problem will give a goose bump and force us to think about scary future.

If we don’t have enough money it  is bound to cause a lot of stress.

Various thoughts will cross the mind …

·        What will happen if I lose my job?

·        How will I meet my financial goals?

·        What if I suddenly need a lot of money for medical emergency?

·        What if I am not able to give my kids all the things they want?

It is possible that even a respectable amount of money saved at might not end our worries, but it will surely bring some peace of mind and lower the stress.

As a general rule of thumb, If a person has worked for X yrs in his life, he should at least have X/2 years worth of basic expenses saved at the end. This could be a general formula which one should aim for at the least.

6 – To pass on to our loved ones

We can see that a lot of families struggle for money generation after generations. The grandfather worked for money all their life, then father and then the son is also doing the same.

Many people who struggle financially set a goal in life that their kids should not face the same. They want to leave them a house and some wealth which makes their start a little easier in life. Although they also teach them money lessons and make them responsible.

If we create wealth in your life, we can leave some part of it for your kids so that they can pursue things they truly wanted to do and not work just for money to bring food on the table.

A lot of wonderful people are never able to do things in life which they truly want to do. They are not able to live their own life fully because of the money matters. If they already have some comfort on their kitty they can do much better in their life without fearing for just to meet the needs.

Finally

To conclude, there is a great possibility that one or more things mentioned below will happen to you if you do not get serious about saving money in your life going forward.

·        We will be spending a lot time worrying about future and how will your life end

·        We will depend too much on others (your kids may be) for money

·        We will have hard time maintaining a good standard of living

·      We will be too dependent on our active income and will be forced to keep working even when we don’t like it

·        We will find it tough to lead a better life compared to current lifestyle

·        It will be hard for us to focus on things we love to do, because we don’t have enough money or time

If we have still not crossed the age of 45, We still have a good chance to create a respectable corpus by the time we retire, even though we have lost a lot of time for compounding. This needs a proper planning and assistance through a good advisor.

Life Insurance as Investment is that makes sense??

Insurance is very important for every individual but is it right to mix it with investment products, different peoples will have different opinions lets understand the pros and cons of mixing insurance with investments.

1. TRADITIONAL POLICY GIVES LESS COVER

If we buy traditional investment policies the life cover offered by them is quite low as compared to buying a term insurance plan. Generally traditional plan offers 10 to 12 times life cover. So for example a person aged 30 years group wants one crore life cover, he may need to have policy of about Rs. 10 lakhs annual premium to cover that much insurance. Overall return of these products range between 4-6% P.a. Same person can get one crore insurance cover in Rs.12000-15000 by purchasing a term insurance cover. The remaining amount can be invested more smartly in other investment avenues where he can get 8-12% returns.

2. WE GET OBSSESSED WITH TAX SAVING

Another major reason for buying insurance is saving tax. Historically if we analyse the data, last quarter of the financial year gives as much business to insurance companies as the other three quarters together. In the last minute planning people buy insurance just to save tax; not for insuring themselves and without understanding the implications and future commitments, this results into lots of policy lapses later on.

If a person’s objective is to save tax then insurance may not be the best option for tax saving. There are various other instruments available which offer tax savings as well as better returns. PPF (8% tax free), NSC (8% but interest is taxable) and those with daughters below 10 year can even opt for the Sukanya Samriddhi Yojana (SSY) that offers 8.5% tax free.

NPS and ELSS can also be a good option for investors who are willing to take some risk. These two offers market-linked returns. In NPS the investment gets locked till retirement and only 40% of the corpus is tax free. In ELSS funds the investment is locked for three years and have the potential to give significantly higher returns, though the risk out there is also higher. For ELSS like PPF the amount received is also tax free

If we compare the returns of a traditional endowment plan with PPF and term plan combined or with ELSS funds and term plan combined we see the eye opening difference between their returns. If we assume a return of 8% for the PPF and 12% for the ELSS fund, both combinations would give far better returns and higher insurance cover to the buyer.

3. WHY PEOPLE STILL BUY IT

Although they do not offer very high returns but still people buy it mainly

•      High Commission to agents : As other products like term insurance and ULIPS offer very little commission compared to traditional products, agents always try to push traditional policies. Generally the agents are from some reference and people could not say no to them and buy these policies.
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•      They enforce a saving habit in the policyholder : These policies are generally for very long duration (20-30 years) and the agent keep on reminding (although more for their own commissions) to pay , Further people take it as a responsibility towards their families and afraid of losing money due to lapsation they keep it alive.
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•     Time value of money: Generally people don't realise that the huge maturity amount being projected may mean little after 25-30 years.  The Payouts in these polices are not given as lump sum but are spread across the years, which reduces the net return significantly.

4. SO WHAT SHOULD WE DO??

Well as mentioned above it is better to keep insurance and investments separately. Normally we should have insurance of ten times of our annual income (though it may vary based on future responsibilities and expenses). Term insurance can be a better option which gives a large coverage in small premium. The remaining amount can be invested base on a person’s risk appetite and requirements. For example if he needs to save more for tax saving under section 80C then for risk averse investors PPF, NSC or SSY are right options and for those who are willing to take risks NPS and ELSS are right products.

For general investments other than tax savings, mutual funds could be a good choice where a person can invest in Debt funds, Balanced funds and Equity based funds based on a persons need and risk appetite.

Every person should have insurance however the insurances should be brought for the main purpose of insuring the family towards some unexpected events not for tax savings or investment purposes.