How to save 30-40% of your income
As a kid I remember getting irritated whenever the old people would get together. Now they’ll start talking about how expensive everything is, I used to mutter. Back in those days, kids couldn’t utter aloud all the insidious little comments that were swimming around in their heads when adults were around. “Arrey, on a salary of twenty rupees you could run the house and then have something left over? That shawl mamijee wears, no? That cost a full five rupees. Now toh, you can’t buy it for five thousand only.” Everybody shakes their heads. “Tch tch. Zamana hi kharab hai (these are bad times).” As a kid I remember buying sweets for 5 paise and bus tickets cost 25 paise (and I’m on my way to irritating the life out of kids in the family). My daughter has never seen coins below one rupee. Her daughter will probably say the same for fifty bucks. The fall in purchasing power is the reason that we worry about meeting our expenses when we retire.
Inflation is relentless and hurts the retired much more than those who earn current inflation-adjusted wages. We tend to underestimate what we will need 30 years from today, anchored as we are to the costs and income flows of today. My column from last week, where I mapped how much we need to save to meet our retirement saving goals, got a whole lot of responses, questions and push-backs. I wrote that at age 30 you need to save 30% of your post-tax income and at age 40, 40% of your post-tax income to target a very comfortable retirement and leave the corpus to your kids. You can read the column here: http://bit.ly/2ruHEtK. Over the next few weeks I hope to keep the conversation going and take up some of the questions and push-backs in this space.
Many readers wrote in to ask if savings of 30 to 40% were even possible. Let’s open up these numbers. First, you need to save this much only if you don’t have a single rupee in savings anywhere. If you have savings or other assets, this number will come down. If you plan to keep working beyond age 60, this number will come down. Most people have more than they think. Consolidate your money. There will always be money lying around in savings deposits waiting for an emergency. We hoard cash thinking that we will need it in the near future. I know a family that kept Rs7 lakh in a saving deposit for over 5 years waiting for the ‘sudden need’ to happen. Use financial products to create an emergency fund and buy a medical cover for your family and a pure term cover for yourself to build a safety net. You need less liquid cash if you do these three things. Next, count all the balances in your provident fund, your Public Provident Fund, your fixed deposits, gold, any real estate other than the home you live in. Include the value of your mutual funds if any, find out what the value of the endowment or money-back policies are and count those in as well. The more you have already, the less you need to target. Do not underestimate the power of order in your money box. Unless you know how much you have already, how will you target the future? We don’t take simple solutions seriously when it comes to money, thinking that we need rocket science to get this right. We don’t. Simple common sense works.
Two, remember that you are already doing 24% of your basic income as savings through your Employees’ Provident Fund (EPF) deductions. You contribute 12% and your employer matches that. By age 30 most people have begun to do at least their tax-saving investments, if not a bit more. Count that in when you think about the 30% or 40% number. If you are self-employed or not part of an EPF, then you are more vulnerable than those with a mandatory retirement plan in place. Make it mandatory in your head to save at least as much as others are doing with their EPF as the first step. Then keep bumping up the number as your spending gets used to the saving rhythm.
Three, saving becomes a habit when you remove what you want to save from your spending money. Cash in the bank gets spent. And spending adjusts to what is available. Separate out what you intend to save from your salary or money inflow account. You can use another bank account to do that. In your head, label that bank account as ‘my investment account’. Every month simply move money out of your salary account into your investment account. Once you know you can save regularly, you will be able to move the savings into investments.
Four, the rule of thumb can be tweaked into an easier saving schedule once you get used to saving and investing. The 30s and 40s in a householder’s life are the decades of high expenses—the home and car EMIs are high, kids are growing up and you are saving for their education and marriage. But the decade of the 50s is one of high income and much lower spends. You are at the peak of your earning cycle. Your home EMIs are paid off (if they are not, know that they should be). Your kids are financially independent. This is the decade when you can save at least half your income. I know people who save almost 70% of their income at this age. If you are disciplined enough to target a much higher saving rate in your 50s, you can reduce the burden on your younger self.
But know this. You have no recourse but to work with a financial planner. Common sense and discipline will get you started. But 3 years into your do-it-yourself plan and you will understand that you need a professional to do this for you. A professional that you need to pay.
Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India. She can be reached at firstname.lastname@example.org