A reader (whom I will not name to protect his identity), shared his question in the Financial Concerns Survey:
I am unable to save any money. It is really tough. And it is not that I don’t know the benefits of saving or investing. But even then, I am not able to do it. Every month, all I can manage is to pay my ever-growing bills. Nothing more.
And in past few years, the regular payments I have been making to repay Credit Card debt has also been rising steadily. This once again adds to the fixed monthly bills I have to pay.
How do I get out of this cycle of living paycheque to paycheque? How do I start saving for future?
Now this is a very common personal financial concern. How to save? Leave alone investing. Lets keep it very simple for now. How do we just start saving?
Lets see what exactly is happening here…
This person gets his salary every month. He pays out EMIs (car loan, housing loan, etc.). He purchases all the regular household essentials required for home. He pays fees for his kids. He pays his Credit Card Bills. He takes out his family twice or thrice every month for outings and entertainment.
And then…month end comes.
He checks his bank account and as usual, is disappointed to see a very small percentage of his monthly income remaining in his account.
He resolves to be a better spender next month. He resolves to save and invest from next month. And this has been happening for quite sometime now.
This was just a sample of how his money flows in and out every month. It can be different for different people. But this gives a rough picture of what generally happens every month in households.
But important point to note here is that the intention of saving (and investing) comes after all making provisions for all the known expenses.
And theoretically speaking, it is wrong.
I know it is easy for me to say it because I am just writing about it. But when one gets bills every month, the first reaction is to clear it off and then think about saving anything.
But you need to understand. Bills are there because of your past actions. But savings are there for funding your future actions.
You can continue denying that you don’t have money to save, after you have already spent all on other expenditures.
But isn’t the responsibility of securing your future rest with you?
I think it does.
Nobody will come and tell you to save and invest for your future. As for writers like me, we will only try to help you get convinced about it. But that is the maximum we can do.
Eventually its you who needs to find a way to save…no matter what. Think of it. You can choose not to save.
But if you don’t, then after some years when your non-earning life starts, how will you find the money to survive? Who will pay for you and your health?
Now you must be getting the picture I want to show you…
Nobody wants to start their retirement with less-than-sufficient amount. And just think of it….what will you tell yourself when you are 60 years old?
‘I could not save when I was young because I was busy spending money on things which were not worth spending on.’
Couldn’t have been sadder than this…
So what can you do? Or rather what should you do to change all this?
I have some thoughts which I think you can tweak according to your own situation and use:
Step 1: Change Your Thinking
I have written about this earlier also in this article, and am doing it again. You not being able to save money, is your own problem. Nobody else’s.
But who will be affected by it?
You (in your future).
So you need to tell yourself that you will do it. You will save every month. And even if it means that you need to cut down on few expenses.
Step 2: Treat Savings as Monthly Bills
Surprised by this statement?
But I am telling you that you won’t be able to save unless you start treating your savings as monthly bills. Bills, which cannot be defaulted. Think of it as something which if you don’t pay, someone will come after you. Just like loan recovery agents.
I know its tough. In case of loan EMIs, you have signed legal contracts, which forces you to pay up every month. But you need to think on same lines when thinking about saving.
You need to come up with an imaginary legal contract, which forces you to fund your savings every month. Think of it as your monthly savings is your additional EMI.
Step 3: How much to save?
Now this is something which only you can answer. You need to honestly evaluate your current expenditures in details. You need to figure out whether there are some expenses which you can avoid?
For example, if going out with you family everytime costs you around Rs 1500, and you go out about 4 times a month…can’t you reduce it to 3 times a month?
That will release an additional amount which can flow into your savings?
And I am telling you, that every month there are some miscellaneous expenses which are recurring in nature. But these expenses are more about greed (desires) and less about needs. Generally, some of them can be eliminated. So do this exercise. Have a look at all your expenses for past few months and I am sure you will find some expenses, which you now will find were totally unnecessary.
Step 4: How to do it exactly?
The first thing you need to ensure is that you have about 6 months worth of expenses with you as Emergency Fund. If you don’t have it, then it’s a big mistake. You can never be sure of what might happen tomorrow.
And if in case of emergency, you have to sell your investments, then you will break the process of compounding – simply speaking, you would not become as rich as you could have become.
So lets divide the word Savings into 2 parts:
Savings & Investing.
Right. These are not same. Saving is for short term and Investing is for long term. Personally for me, anything less than 5 years is short term.
So this is what you do exactly:
- Start putting some money aside every month in a recurring deposits. Keep on doing it till you have about 6 months worth of expenses saved in it. This is your Emergency Fund.
- Once you are done with the above or are close to achieving your 6-Months Emergency Fund, try saving some more amount in Fixed Deposits or Recurring Deposits. I know a lot of people will be against this approach as I could have very well suggested going for mutual funds. But I don’t consider Emergency Funds as Savings. So once you are done with accumulation of your Emergency Fund, you still do not have any savings. Right? So you need to save.
- Now once you have accumulated money in your emergency fund and in your savings, time is right for moving on to investing. Investing is what you do when you don’t need the money for more than 5 years. It is done for long term goals like Retirement, Children’s education etc. You can start with a small SIP. And slowly and steadily, keep increasing your SIP amounts every year.
- Frankly, a very small SIP may not be able to help accumulate large amounts of money for retirement. But over a period of time, as and when you reduce your unnecessary expenditures and your income also rises, you can increase your SIPs and see its amazing rewards. It can even help you pre-pone your retirement plans! Isn’t it a dream come true?
I have already written quite a long piece. So I better conclude it now… 🙂
So here is another fact which will deter you from starting. When you take the above approach, its possible that you will be demotivated to see the slow pace of savings and investments growth. But don’t worry. This starts slowly but eventually snowballs into something big.
Never underestimate the power of small amounts compounding over long periods of time. They can become huge!! And I mean really huge.
Another thing which might come to your mind is that you should rather start saving and investing, when you are free from you’re your loan EMIs.
Personally I don’t think that it is advisable to do it. No matter how small the savings are, please start it even if you have a loan running. By not saving early, we pay a huge price by accumulating a much smaller corpus than what would have been possible, had started early.
So that’s it from me…
Do share your thoughts on treating Savings as a monthly bill and SIP as a monthly EMI. Or if you think this approach can be tweaked or if there are any ways of increasing savings, then you can share those too.