How can we save more in the same Income?

We all want to save more but we have limited resources, so how can we increase our savings in those resources only. In this post we will try to find out few simple tips which can be used to improve our overall savings.

1. Have a budget and follow it

We should have proper budget so that we can control the expenses within limits. Best way to do it is by fixing certain percentage of our income as saving and the remaining amount be spend or

Income - Savings = Expenses.

2. Nothing is free

We generally tend to spend more when using a credit or debit card, than when using cash. Similarly, we also treat a windfall income like a bonus and regular income like a salary differently. If we realise that the money spend by credit/ debit card will also go from our own income only and bonus is also hard-earned money, we may be more sensible while splurging this money.

One time cash flow can be invested through STP way which we have discussed in my last post (see the post How to invest large sum when market is at all time high?

3. Not Just Save but Keep on Increasing the Amount

It’s good to start saving but that is not enough. We should regularly increase the quantum of savings and investment. This can be done in line with the increase in income. In few cases like in EPF this increase happens automatically, as contributions to it is fixed as percentage of salary. However For other investment avenues, the onus of increasing contribution lies with the investor. By increasing the quantum of investments annually, we can reach to our goal faster or generate a bigger corpus.

As a thumb rule we should increase the amount by the rate of inflation. In mutual funds there are “Step-up SIPs  by which we can increase the SIP amount by certain amount or percentage  at a predefined time interval which can automatically increase our saving rate.

4. Saving is not enough, It should be invested properly

Once we have decided to save more and increase the quantum regularly, the next step is to route this savings into suitable investments. Few people are very good in saving but not good at investing. If we keep large amounts idling in savings accounts that generate 3.5% returns and in tax inefficient FDs then it is not a very sound investment strategy.

We need to overcome from loss aversion mentality, which occurs when the pain of losing money is greater than the happiness felt in gaining an equal amount. We need to understand that while keeping the money idle in bank accounts, assuming its safe we ignore the risk of inflation which ends up earning with 3.5% returns, actually lower than inflation. There are different instruments, suitable for different time period, like a cycle is good for 5 Km but not for 5000 Km equally an aeroplane is suitable for 5000 Km but not 5 Km. So we may take certain calculative risk and manage the risk in a way so as to improve our overall returns.

We should diversify our investment but also avoid overdiversification, have moderate return expectations and automating the investment process through long-term SIPs.

5. Keep a Watch and Rebalance it

It is also equally important to rebalance the portfolio based on our own requirements and market conditions. This rebalance can be between asset classes or between categories. Most people increase allocation when the market is doing well and reduce in a bear market. By Automating asset rebalancing, we can remove the biases and make it more efficient.

6. Stick to it; don’t divert the funds

Some time we start using the money earmarked for goals for other needs. We can avoid it by segregation of investments for specific goals, by this we can be clear how we are doing to achieve these specific goals.  We can stop from dipping into investments prematurely by opting for investments that restrict liquidity. Long-term lock-ins help improves the power of compounding. As the power of compounding is back-ended and the maximum benefits come in later years.

For short term and immediate requirements, emergency fund is a better way so as to not to digup from long term investment portfolios. This fund should be invested in a liquid instrument so that it is readily available.

For example, assuming a return of 12% P.a., If someone investing Rs. 5000/- monthly for 5 years will get Rs. 4.12 lakhs at the end of the period while if he continues the monthly investment for 20 years his total corpus could be almost Rs. 50 lakhs which is 12 times than five years corpus while investment amount has gone up by four times only.

These are few simple behavioural tips which can be used to improve our overall savings without putting much pressure on our spending habits, if used properly can give visible change in total portfolio.