What does the word “saving” mean? Money left after spending? Well, it is just that for most people. But is that enough? Perhaps not. Why else would your bank balance appear so meagre whenever you set out to plan your dream vacation or buy a sedan. Why do you end up feeling helpless and thinking “Never mind. May be next month…”? And the feeling lingers on, until the next month, and the one after that, and the one after that.
So why is your seemingly handsome salary falling short?
Let us see what are the main reasons.
- More is actually less: Most of us tend to spend more when we have more money at our disposal. Whether it’s dining out frequently or buying extra pair of shoes on Flipkart, it doesn’t hurt to be a little extravagant if we have excess money in the bank (exposed through debit card).
- Inability to prioritize: We often use all our savings for the most important aspirations like buying a house. And while we are saving for that, any plans for a trip to Machu Picchu or a diamond ring for your wife on your 5th anniversary are almost taboo. This behaviour is governed by our inherent psychological prioritization which makes us compromise on smaller aspirations to improve our shot at the bigger goals.
- Money is lost in banks: Money in our savings account loses its value over time. While our bank gives 3-4% interest on the savings, inflation itself spikes at close to 6-8% over that time. And while fixed deposits (FDs) yield slightly higher rate of interest (6-8%), we lose liquidity as the money is virtually locked for the deposit term.
Here are few ways that can possibly solve the problem –
Keep the extra money aside:
Make the money accessible with little friction. That way, you would spend only when it is important and avoid wasteful expenses. People keep multiple bank accounts, transfer a chunk of salary to Dad’s account or just keep doing FDs to avoid overspending. The key here is to know how much you would need for the rest of the money and keep aside the extra money earliest.
Create virtual buckets for each goal:
While it is important to understand how much you should spend, its equally important to know how much you need, for what?It often helps to categorize our savings in order to stay motivated and be effective. This level of detail makes decisions tangible because there is a timeline associated with each goal. You could be saving for buying a house or retirement or it could be for an international vacation next summer. Setting a separate fund for each one of them and distributing your savings proportionally would help you fulfill all of them much faster.
Invest wisely without taking risk:
There are few safe as well liquid investment options that can easily get returns in the range of 8-10%. One of the best options is debt mutual funds. These funds are not equity based and therefore do not possess the same risk as stock market. These are great for keeping your savings because, there is no penalty for withdrawing from them whenever and how much ever needed. Once you have saved enough for your short term goals, you can invest in other long term products also such as equity funds, gold ETF etc.