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How much should I save?

Monday, April 16, 2018
By Kunal Bajaj

Kunal Bajaj, Founder & CEO, Clearfunds

If you’re wondering how much of your income you need to set aside for a secure future, the answer is … as much as you need to support your lifestyle.

Follow the 50–30–20 rule of thumb.

Spend 50% on necessities (rent, food, transport, education), another 30% on things you want or enjoy (“discretionary expenses”) and save the remaining 20%.

#1 — Start early

  • Start saving as soon as you can. The sooner you start, the earlier you’ll reach your savings goals.
  • The power of compound interest works in your favour. Give your money time to grow, and you will reach your goals faster.

#2—But not before settling your debts

  • First, let’s understand what happens when you borrow money to buy something. You accelerate your consumption — you spend today with tomorrow’s income (at a high cost, of course).
  • The high interest rates on your credit card (up to 3% a month) just can’t be made up by your investments! Borrowing at such high rates leaves you much poorer off then when you started.

Do you have a debt to settle? Pay it off first.

  • If you have low-interest-rate loans (such as a student loan or an agricultural loan), consider investing in a debt fund where the interest you earn exceeds that the interest you pay out. That’s smart money in your pocket!

#3— Create an emergency fund

  • Make sure you have at least four months’ worth of living expenses stowed away in an immediately accessible bank account or in liquid or ultra-short term funds.
  • This is your emergency fund and you must able to withdraw it immediately at will. Be mindful that you use it only in times of real emergency, such as unexpected medical bills or the loss of a job. Keep this money in a separate bank account or a fixed deposit so that you don’t touch it without good reason to.

#4 — Set targets based on needs
Calculate how much money you’ll really need for short-term and long-term expenses.

  • Say, you need to buy a ₹ 12 lakh car five years from now. You need to save ₹ 20,000 a month for five years to reach your goal.
  • But if you were to invest your savings and instead earn, say, 8% on them, the amount you need to save each month to buy your car in five years drops to ₹ 16,350 a month.
  • You’d also have to account for taxes on returns, which vary depending on the time period of your investment and the tax slab applicable to you.

You can use our cool calculator tool to find out how much your money would amount to at 8% a year. We think 8% is a reasonable number to expect in light of current interest rates and economic growth.

#5 — Save for retirement
Its never too early to start saving for retirement. We all dream of a life where we don’t have to work for money anymore, and our money works for us instead! The key to a successful retirement is to start early. Our calculator shows you that the earlier you start saving, the more you’ll have when you retire!

So if you’ve always dreamed of buying a round-the-world ticket on your 70th birthday, or setting up an education fund for your grandchildren, start saving for it now.

The author is a SEBI-registered online investment adviser

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