What’s your dream goal and what’s preventing you from achieving it? A simple question, but the answer is different for each one of us. Yet, the one obstacle in the path of achieving our financial goals, on which we all would agree, is our rising spending and the inability to save.
While our parents and forefathers believed in saving first and spending later, we have been brought up amid luxury and care, which have now become essentials for us.
At the same time, we have also been brought up with greater exposure to global trends, and the one trend we have adopted readily from the West is consumerism.
We want it all, and we want it now. Even after compensating for inflation, our salaries are far higher than what the earlier generations used to earn.
Yet, at the end of the month many of us find not a paisa left in our bank accounts, let alone being able to save and invest.
So, how do you get rich? One way to do that, is by starting to take money for yourself.
Before we delve deeper to understand the concern, let us take a look at the different questions that crop up among different age groups:
• I am in my 40s and am unprepared for retirement. How can I catch up, now that time is running short?
• I am 25 years old and I feel overwhelmed by how expensive my life will be. Paying off my student loans, planning a wedding and hopefully buying a house. I don’t know how I can pay for all of this. I want to travel as well, while I am still young, and I would like to start investing. But how can I?
• I am 32. I take care of my parents and two children. I would like to earn more, but it is difficult to boost my income. I am in debt, but I have many responsibilities. On top of all this, how can I save?
Saving money is an art; and for long-term wealth creation one needs to save and invest. Most of us are good at spending. We hunt for the best deals in the market. E-commerce has brought great deals right to our mobile phones and we end up buying far more than what one would actually need. In such a scenario, the last resort to save money is to take money from yourself.
Where are we spending?
A quick overview of spends by our customers shows that the top spends are loans and loan instalments (33%), online shopping (16%), travel (13%), clothing (4%) and utilities (4%). Other expenses account for about 30%.
More than 60% of our customers are millennials; and our analysis shows that they are overspending on certain discretionary spends. This money could be saved and invested to benefit from the power of compounding by starting early. Here’s how.
Open two bank accounts—one where the salary is deposited, and the other where money only comes in, and if it goes out, it is only for investment.
Budget all expenses
Recall all expenses that you made in the last 1 year: utility bills, gas, groceries, vegetables, fuel, rent, loans, gym, dining out, mobile bill, and whatever else. Some of the expenses that we fail to budget for are: insurance premiums, emergency funds, unintended purchases, tax and vehicle maintenance. Your list of expenses should be comprehensive.
There are many automatic expense-tracking tools available in the market, which will allow you to do just this.
Fund the savings account
The difference between income to expenses each month should be put in the savings account, the very same day the pay cheque is deposited. Make yourself feel constrained.
End of the year when we get a bonus and an increase in pay, what a feeling it is. But most of it gets spent. My advice is to instead take more money for yourself.
When you decide that you want to get healthy, you don’t directly start pumping iron. You start with a walk or a jog and gradually increase your stamina. Similarly, start your savings small.
Even a small amount of, say, Rs5,000 per month can result in a crore of savings. So, how do you go from Rs5,000 to Rs1 crore? The answer lies in compounding. Over a period of about 30 years, this amount saved every month in equity mutual funds, with a return of 10-12% per annum, would give you Rs1 crore.
If you seriously care about your health, you will drag yourself out of bed and exercise, even in the rain and even if it is just for 15 minutes.
Similarly, one has to save regularly. No matter what, keep aside the money and keep your investments going. A regular systematic investment plan in an equity mutual fund is a disciplined way to create long-term wealth.
The virtuous cycle of income–saving and high income–high savings continues. Create goals and start saving to build wealth. Take money for yourself without forgetting your goals.
Rahul Parikh is head, Aditya Birla Money MyUniverse.