What is Saving?
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. 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 large financial burdens.
Table of Contents
- 1 What is Saving?
- 2 Advantages of Saving
- 3 Expense Management
- 4 Financial Planning Process
- 5 How to Save Money
Therefore, savings helps an individual or family become financially secure. Money can also be saved to purchase expensive items that are too costly to buy with monthly income. Buying a new camera, purchasing an automobile, or paying for a vacation can all be accomplished by saving a portion of income.
Advantages of Saving
Following are important advantages of saving discussed briefly:
It helps you to meet unexpected expenses like car repair, expensive medical bills, or a sudden job loss. If you were to lose your job, you’d be thankful you socked away a good amount of money into your emergency fund to tide you over until you found a new job. Thereby acting as a safety net. Saving should ideally be equivalent to three to six months of expenses.
Saving helps to get rid of your tensions like will I be able to pay my educational expenses on time, or will I be able to meet my medical expenses? stop worrying as now you have a good amount of saving to meet your obligation, thereby saving reduces your stress level.
Enable You to Travel
Your savings account isn’t only for things you need—it can be for things you want, too. Saving up for a big purchase beforehand means you won’t pay extra in finance costs such as interest and fees, you can also use that money to plan your desired vacation like a visit to Paris, France -the city of lights, Machupicchu, Peru, the Grand Canyon etc.
Freedom gave us the ability to pursue our dreams, so it is equally important to create such independence in our finances too, this is accomplished by saving and investing. As all of us have desire to have material possession like house, car white goods and spend lifestyle like watches jewellery and clothes .so it is important to save and invest in return that are higher than rate of inflation.
We should understand the difference between nominal and real returns. When you invest in a 6 percent fixed deposit, the return that you get is “nominal”. If inflation is 4 percent, the “real” return is just 2 percent. And, in higher tax brackets, even this 2 percent may go away in taxes.
Therefore, not taking risks at all may be alright to protect your savings but it may not allow your savings to grow after adjusting for inflation and taxes. To achieve financial independence, it is therefore paramount that you invest in high yielding assets.
But, with small sums of money at our disposal, the only viable option is to invest in equity markets through institutional vehicles like mutual funds.Creating financial independence requires a lot of discipline. As a thumb rule, one should save at least 25 to 30 percent of one’s monthly earnings. Also, the younger you are, the higher percentage should be allocated towards equity investments.
Retirement is an important reality for everyone.When planning for retirement, it’s always better to start as early as possible for best compounding returns and not to rely heavily on one source of savings. Because there are always emergencies in old-age.
So, having a sufficient corpus to deal with all these is crucial. You can opt for unit linked insurance plan (ULIPs), ULIP are designed in a way that offers you both protection and investment benefit, till the age of 99 to 100 years.
These are the plans which not only take care of providing your beneficiaries with death benefit but also take cares of your living needs,during your retirement. You have the flexibility to enter into Whole Life ULIPs at any age between 18 and 100 years and can exit at any age. You can also choose till what age you want to save money, or accumulate money. This could be till your retirement.
Management of spending can easily be achieved by following the financial planning strategies. This involves following steps:
Devising a Budget
Budgeting and saving money don’t come naturally to many people for obvious reasons. Spending money on nonessentials is so easy, even if you’re committed to a well-laid spending plan.Budget, which can help you reorganize your finances, prioritize spending, and manage debt.
Thus allowing you to make progress toward your long-term financial goals. making a budget involve the following:
- List all your income after taxes—for example, employee and freelance income, investment income, and interest earned on any savings accounts. Then list all expenses—for example, rent or mortgage payments, credit card payments, instalment loan payments, grocery receipts, and utility bills.
- Subtract the expense from the income to get a general picture of your financial health. If your income total is larger than your expense total—congratulations—you just found more money for saving, investing, and paying down your debt. But If your expense total is larger than your income total, all is not lost, but you’ll have to make some choices about where you spend some of your money going forward if you want to balance your budget. fu.
- Reduce your expenditure by categorising them into fixed expenses, discretionary expenses and variable expenses. Fixed expenses are those which have has to be incurred like rent, medical expenses, you can do nothing with it , it remain constant . the variable expenses can be controlled to an extent by bringing behavioural changes like turning of light can reduce electricity bills. discretionary expenses can effectively be controlled and generate opportunity for saving.
- Adopt a 50-20-30 approach where 50% of your after-tax income on housing, food, and other necessities 20% on paying down debt or increasing savings 30% on whatever you want—discretionary spending.
- Put your budget to work, means you must strictly follow the budget prepared by you in order to achieve financial goal.
Cutting Down Unnecessary Expenses
Start by cutting spending on items you don’t need. For example, do you need a $5 coffee every morning? Could you make do with a smaller, older car? Instead of an expensive vacation, would you be willing to try a stay-at-home vacation (staycation)?
These types of choices are very personal, so there’s no right or wrong answer. But laying them out on the table can at least help you understand your priorities and some of the options you may not have realized you had for saving money.
Saving for retirement always sounds like a good idea in theory, but it isn’t always easy in practice. It involves following steps:
- Start saving early,Sign up for your retirement plan as soon as you’re able to. The sooner you start taking advantage of this benefit, the more you’ll start to save. For example, if you save at 25 v/s you save at 35, the earlier you start, your savings will be benefited of the power of compounding.
- Find right retirement investment option which will be in tandem with your monthly income. Some of the options in India are; Invest in real estate, Reverse mortgage, Senior citizen saving scheme, Mutual fund, Pension fund.
- Know your retirement goal: Your expenses during retirement might not be the same as they are when you’re working. But that doesn’t mean you won’t have any expenses. You’ll probably need somewhere between 70% to 90% of your current income to cover yourself in retirement.
It’s a good idea to plan now for what you need later. If you’d like to maintain your current living standards, try to make sure you’re contributing enough to cover those costs later in life. If you think you won’t have as many expenses in retirement, you’ll still need to save, but you can adjust your goals accordingly.
- Tax efficacy: Once you reach retirement age and begin taking distributions, taxes become a big problem. Most of your retirement accounts are taxed as ordinary income tax. That means you could pay as much as 37% in taxes on any money you take from your traditional 401(k) or IRA.
That’s why it’s important to consider a Roth IRA or a Roth 401(k), as both allow you to pay taxes upfront rather than upon withdrawal. If you believe you will make more money later in life, it may make sense to do a Roth conversion. An accountant or financial planner can help you work through such tax considerations.
- Insurance: A key component of retirement planning is protecting your assets. Age comes with increased medical expenses, and you will have to navigate the oftencomplicated Medicare system. Many people feel that standard Medicare doesn’t provide adequate coverage, so they look to a Medicare Advantage or Medigap policy to supplement it. There’s also life insurance and long-term-care insurance to consider.
financial discipline involves control of money, inculcating the habit of saving and avoiding excessive expenditure. One should consider following steps to harness financial discipline in order to achieve our financial goal.
- Prepare a monthly spending budget and stick to it.
- Invest with a goal. Goals give direction and help you in selecting right product.
- Avoid loans for your desires. Better do a financial planning check before going in for a big purchase.
- Invest monthly to become regularise in your savings and this will also help you maintain consistency.
- Motivate yourself by visualising the goals and the end result for which you are working for.
Financial Planning Process
The financial planning process is a logical, six-step procedure:
- Determining the Current Financial Situation
- Developing Financial Goals
- Identifying Alternative Courses of Actions
- Evaluating Alternatives
- Creating and Implementing a Financial Action Plan
- Reevaluating and Revising the Plan
Determining the Current Financial Situation
Determining the current financial situation means determination of the situation with regard to incomes, costs, liabilities, loans, receivables.
Developing Financial Goals
Developing financial goals – firstly, an analysis should be performed and the needs for achieving what is wanted should be determined, and it is followed by specifying goals and determining how the current income will be spent in order to provide funds for investments for securing the future financial security.
Identifying Alternative Courses of Actions
Identifying alternative courses of actions means determining the factors which will affect the continuity of actions, expansion of the current situation, new courses of actions, the creativity in decision making and considering the possible alternative solutions which can lead to more effective decisions.
Evaluating alternatives means taking into consideration the conditions in which the business activities will be performed, the values of the organization and current economic conditions in the environment. It needs to be evaluated where will the assets be invested, what kind of costs will be made for production, also to evaluate the risks, and which information will be used in order to make relevant decisions.
Creating and Implementing a Financial Action Plan
Creating and implementing a financial action plan means to develop plan, i.e. to choose way to achieve the financial goals. The financial action plan needs to be implemented by all employees, to provide assets, to invest, to maintain inventory, to provide shares or bonds or mutual funds.
Reevaluating and Revising the Plan
Reevaluating and revising the plan means dynamic following of the plan implementation, assessing the financial decisions and adapting to the new changes of personal, social and economic factors. The review of the implementation of the financial plan enables priority adjustments which will enable the organization to achieve its financial goals.
How to Save Money
Following are ways to save money explained briefly:
- Eliminate Your Debt
- Set Savings Goals
- Pay Yourself First
- Stop Smoking
- Take a Staycation
- Spend to Save
- Pack Your Lunch
- Annualize Your Spending
Eliminate Your Debt
If you’re trying to save money through budgeting but still carrying a large debt burden, start with the debt. Not convinced? Add up how much you spend servicing your debt each month, and you’ll quickly see. Once you’re free from paying interest on your debt, that money can easily be put into savings. A personal line of credit is just one option for consolidating debt so you can better pay it off.
Set Savings Goals
One of the best ways to save money is by visualizing what you are saving for. If you need motivation, set saving targets along with a timeline to make it easier to save. Want to buy a house in three years with a 20 percent down payment? Now you have a target and know what you will need to save each month to achieve your goal.
Pay Yourself First
Set up an auto debit from your checking account to your savings account each payday. Whether it’s $50 every two weeks or $500, don’t cheat yourself out of a healthy long-term savings plan.
No, it’s certainly not easy to quit, but if you smoke a pack and a half every day, that amounts to nearly $3,000 a year you can realize in savings if you quit. According to the Centers for Disease Control, the percentage of Americans who smoke cigarettes is now below 20 percent for the first time since at least the mid-1960s — join the club!
Take a Staycation
Though the term may be trendy, the thought behind it is solid: instead of dropping several thousand on airline tickets overseas, look in your own backyard for fun vacations close to home. If you can’t drive the distance, look for cheap flights in your region.
Spend to Save
Let’s face it, utility costs seldom go down over time, so take charge now and weatherize your home. Call your utility company and ask for an energy audit or find a certified contractor who can give you a whole-home energy efficiency review.
This will range from easy improvements like sealing windows and doors all the way to installing new insulation, siding or ENERGY STAR high-efficiency appliances and products. You could save thousands in utility costs over time.
Pack Your Lunch
An obvious money-saving tip is finding everyday savings. If buying lunch at work costs $7, but bringing lunch from home costs only $2, then over the course of a year, you can create a $1250 emergency fund or make a significant contribution to a college plan or retirement fund.
Annualize Your Spending
Do you pay $20 a week for snacks at the vending machine at your office? That’s $1,000 you’re removing from your budget for soda and snacks each year. Suddenly, that habit adds up to a substantial sum.