Remember when you would save money in your piggy bank? Or keeping a secret stash hidden between the pages of your notebook?
Yes, you’ve probably come a long way since then. Saving for the future is more important to you now as compared to when you were a child.
Everyone needs a financial safety net, and you must do that by saving when you can, and the best time is to start now. Growing up you may have started writing down your expenses or keeping a note of where you want to spend your money. You do the same as you’ve grown up, just on a bigger scale
We caught up with Nupur Joshi, who completed her Master’s In Enterprise Risk from Columbia University and is currently working as a Management Consultant with EY, Times Square.
Speaking about the importance of saving money, Nupur says, “First and foremost, savings are important to prepare for a rainy day. If one has cash set aside during emergencies, it is less stressful financially. But that is not the only purpose of saving money. Saving money is also important to prepare for the future and to build wealth. When it comes to how soon one should start saving, the best answer would be as soon as possible. Since money compounds over a period of time, it is important to start saving early to take advantage of the magic of compounding.”
Breaking down the saving plans, let’s try to understand why savings are important and how you can start saving money for your future plans. You can set your saving goals by deciding if it’s long-term or short-term. Long-term savings may be for the down payment of a home, your child’s education, or retirement, and these are goals that are 4+ years. Short-term savings are for less than 4 years where your goals may include an emergency fund (3-9 months of living expenses), a vacation, or a down payment for a car.
You can achieve these financial goals through timely deposits such as a savings bank account, current deposit account, fixed deposit account, recurring deposit account. We have explained the terms below:
Savings Bank Account
This is a type of account that is suitable for people with a definite and stable income. You can open this account with a minimum initial deposit which varies from bank to bank. You can deposit money at any time in this account. Interest is earned on the balance deposit and a minimum balance must be maintained. All these factors vary from each bank.
Current Deposit Account
It is similar to a savings bank account except that the bank does not pay interest on the balance amount. Rather the holder pays an amount every year to the bank as an operational charge. The savings bank account may have restrictions on them, this type of account is suitable for companies, businessmen, and institutions such as colleges.
Fixed Deposit Account
Some people may need to put away their money for a long period of time. When you deposit money in a savings bank account, banks provide a low interest rate. When you deposit money in a Fixed Deposit, you earn a higher interest rate. This specified period of time may range from 15 days to 3 years or even longer. On request you may encash the amount, but with a lower rate of interest.
Recurring Deposit Account
While opening a recurring deposit account, the person agrees to deposit the money for short periods of time. The total amount of interest is then payable on maturity. However, the depositor is allowed to close the account before the specified period and take whatever interest is available before that time period.
How Can You Create A Budget To Save Money?
Most people need to track where their money is going every month and the best way to go about it is to keep a budget. Having a budget makes you feel more in control of your finances and easier to save for your goals. Below, you’ll find 5 easy steps on how you can create a budget.
1. Calculate your income
The foundation of your budget will be your net income, your take-home pay. Make sure to consider your net income – which is your total income minus deductions for taxes, and employer-provided programs to avoid overspending.
2. Track your spending
Once you track where your money is coming from and how much, you can figure out where it’s going. Tracking and categorising your expenses can help you understand where your money is going and where you can cut back and save. Start by making a list. Under that, note down the following:
- Fixed expenses – bills, utilities, loan payments
- Variable expenses – groceries, gas, entertainment, eating out
- Daily spending – travel, coffee, lunch, etc. – segregate these into fixed and variable
Then bucket your money into three categories, following the 70/20/10 rule.
- 70% of your money should go into fixed expenses, mostly required for you to live a life
- 20% of your money should go into paying back your debt or into savings if your debt is covered.
- 10% of your money will then be the ‘fun’ expenses that you can splurge on.
3. Set realistic goals
Before you start cutting down on your expenses, make a list of short and long-term financial goals. Short-term goals need to take into account goals that can be achieved between one to three years like setting up an emergency fund, paying out your credit card debt, or finishing off a small loan while long-term goals are saving up for retirement, or for your child’s education, or even a car loan. While these aren’t set in stone and can be revised according to your situation, identifying your goals can help you stick to a budget.
4. Make a plan
While everything looks great on paper, execution is where most people fall flat. If you have a plan in place, it will help you stay on course. When everything is in action, you’ll have to compare What you’re actually spending vs. What you want to spend. Setting specific and realistic limits on your spending of each category can help you curb your expenses.
5. Review your budget regularly
Once your budget is in place, the key is to review it regularly to see if you’re staying on course. Your income may change, or your goals may evolve but the foundational elements of your budget need to be set in stone.
The importance of saving money is very simple, it allows you to enjoy greater security in your life. You have a fallback for setbacks in case something unexpected were to happen.
There are more ways in which one can preserve and increase one’s wealth. This can be done through gold deposits, and mutual funds but that’s for another time.
The sooner you save the better it is.
If you want to teach your child how to save at an early age, take a look at this video.