You keep saving money but things just don’t add up to that big amount you want. We know the feeling. Here are some tips on how you can increase your savings over the years.
Ask any Indian today and they will tell you that they are running on a tight budget, irrespective of whether they are earning an annual income of Rs.1 lakh or Rs. 1 crore. This is all thanks to lifestyle and inflation. Consider this: About one-third of your salary goes away in taxes, another third is eaten away by your expenses while the remaining one-third is the only part you can save if everything goes well. So, if you want to save money over the long term to create a good corpus, it is crucial that you strive to increase your savings whenever you can.
Here are some ways in which you could enhance your savings through the years.
- Top-up savings along with those hikes – Every year you might be receiving hikes on your salary. The biggest mistake that you might be doing is enhancing your lifestyle and keeping your investments intact as you start earning more. You really need to increase the rate of savings along with every increase in your income/salary. This is the easiest way you can enhance your savings over time. So, whenever you get that hike, increase the amount you put in Systematic Investment Plans (SIP) of Mutual Funds, your monthly Recurring Deposits (RD) and other regular investments. This way, you would not only be saving more but would also be receiving interest on your savings.
- Make it automatic – We often forget things when it is not a compulsion, like paying our bills for example. This is why automating things is the best way forward. You could set up a standing instruction using netbanking to divert a certain amount from your income to your FD or Mutual Fund investments at regular monthly intervals. This way you will remember that when an investment becomes compulsive, regular and automatic it will help in creating a big corpus over a period of time.
- Lower the cost of investing – Any kind of investing involves costs. This includes stocks, Mutual Funds, deposits among others. It is important to keep a tab on investing costs as the cost might eat into your actual investments leading to you investing lower amounts than intended.
For example, if you are using the services of an online brokerage, review your brokerage plan at least once a year in terms of costs. Also, choose a plan based on your usage of the online trading account. And when trading, choose instruments that would cost you less. This is possible in case of stocks. It is better that you chose to trade in small lots or contracts. This will help you average out your positions. In case of Mutual Funds, investing directly through the fund house will cost you next to nothing.
- Don’t splurge after loan repayments – Many of us take loans for several purposes like purchasing a car or home. When these loans are paid back, you will have excess cash in hand. Instead of spending that extra cash, you could save at least a part of that money every month as if it were an EMI commitment. This might be very tough to start and you might be tempted to dip into the funds, but a small sacrifice such as this will help you amass a big amount over time.
- Put back those discounts – When we make big purchases like consumer electronics or household appliances, we generally draw a budget. Today, with hypermarkets offering discounts, you might be able to purchase those items at prices lower than the allocated budget. The excess cash you were willing to spare for the purchase could either be deposited into your savings account or invested in a financial product so that you feel good about getting a product and investing at the same time.
- Eliminate expensive loans – One of your major expenses every month might be your EMI. Usually, high EMIs are a result of high interest rates. This could be reduced if you choose a floating interest rate option that would be in line with market rates. If you still think you are paying high rates, you could either try to put in more money into the loan to close it earlier or shift your debt to a lower cost one (after assessing the costs of doing so).
- Choose to go long – Long-term deposit obviously earns higher interest rates than short term ones. So when you choose FDs, try to invest with longer tenures. This would not only help you earn higher income but would also ensure that you don’t dip into the funds as it would involve penalties.
- Invest bonuses – Any financial planner would tell you that it is important to invest windfalls like bonuses, incentives and inheritance. But you need to plan them well. The higher the amount, the better should be the plan to ensure that you get the best returns out of them. Lower windfalls might go into your FD but for huge amounts, you must invest them in a mix of equity and debt for the best returns.
- Plan those taxes – Taxes are your first expense and a huge expense at that. Without proper tax planning you might end up losing a lot of your hard earned money in taxes.
- Handling volatility – Both the stock as well as the debt markets entail high volatility today, which means fluctuating returns. Take the present scenario. The Sensex has fallen a lot since the start of the year and might close in the negative. Hence, always have conservative growth estimates for your investments especially when you invest in stocks and equity products.
- Inflation woes – Even though general inflation is on the decline, you must always take inflation into account while investing for the long-term. Without inflation estimates, your total corpus might be worth much lower than what you desired.
- Not being able to meet your goals – Higher return expectations from investments could lead to lower accumulation of corpus and you might not be able to meet your goals due to lack of funds. Always keep your expectations realistic. If returns exceed expectations, cash in on some of them and put them away in safer investments.
Additional Reading: How To Automate Savings And Investments
Don’t know how to start saving? Here’s a plan for you.
Nothing can be achieved without a good plan and the same is true for accumulating a corpus. Even though it would be a big advantage if you start with a good corpus, you could start from scratch too and move your way to your dream figure. But the savings plan in case of the latter and the former would be different. Let us first look at the common points to creating a savings plan before we move on to different strategies.
- Always have micro goals – Instead of looking to achieve a figure like Rs. 1 crore, divide it into achieving Rs. 20 lakhs first, then Rs. 50 lakhs and so on. These are micro goals and are easier to achieve. This will also allow you to review your savings plan and investments for achieving your target amount.
- Be realistic – It is important to set realistic micro goals so that you can achieve them as intended. For instance, it doesn’t make sense to have a goal of attaining Rs. 1 crore in 4 years if you are starting with no investments and save just about Rs. 40,000 every month. Take into account the amount you are able to spare and also take into account investment rates when you are setting micro goals. Don’t overestimate investment growth rates. It is important to have conservative estimates for your investments, especially equity.
- Keep track – As any financial planner would tell you that you need to keep track of your progress towards the goals and make changes if necessary to stay on track.
- Save, save and save – Your household budget is your bible for savings and would decide how much corpus you ultimately accumulate. So, try to draw up a good budget that maximises your savings over the years.
Regarding your savings plan, your strategies would differ if you start with a sizeable corpus when compared to starting from scratch. This is because if you have a corpus you have to just increase your wealth whereas if you have nothing, you have to build wealth.
Additional Reading: The Really Smart Guide To Building Wealth Quickly
Starting from scratch
Since you are yet to create any wealth, it is important to do some groundwork. First, you need to set up your emergency account and ensure that your liquidity needs are taken care of. After you do this, allocate funds for your short term goals or make a separate savings plan for them. Once all this is done, you could start saving for your dream figure. Here are the instruments that would help you.
- Sweep-in/auto sweep – A sweep-in account is a bank account that automatically transfers amounts from your saving account to an FD account. This is done whenever your savings account exceeds a certain level. There are banks that offer facilities to transfer excess amounts from your savings account to your RD too. This would ensure that idle funds lying in your savings account earn higher interest.
- RD – RD is where you deposit a fixed amount regularly over a period of time. RDs are the best way to start creating wealth as they have many advantages. The first one is of course the fact that they provide interest on par with FDs. Then you have the flexibility of choosing an amount (as low as Rs.500) and a tenure (as short as 6 months). You even have loan and overdraft facility for your RD.
RDs are ideal for building a sizeable corpus. If we want to build a corpus of say Rs.10 lakhs over a period of 10 years, you might need only Rs. 5,000. If you want to build it in 5 years, you can do it with Rs. 10,000 per month. Now you also have special RDs like iWish from ICICI Bank. With this facility, there are no penalties if you miss the RD for a month. Your accumulated deposit will continue to earn interest. But remember to use both RD and sweep-in accounts with prudence. Just like your FD, RD accounts are subject to taxes as per your tax slab. If you are in the highest tax bracket, use them judiciously to minimise taxes.
- SIP – SIPs involve making regular installments like your RD. The only difference is here you invest the amount in a Mutual Fund. SIP is the best way to invest in the equity markets. Using an SIP, you can invest lesser units when the market is costly and more units when the market is cheap. Choose between equity and debt funds based on your risk appetite. If you are a novice investor, you can start by looking at SIP in index funds. This is less risky when compared to SIP in equity diversified funds. But remember that equity funds are the best for accumulating a corpus over a period of time.
But there are some thumb rules to note. When you start investing in SIPs, you must be disciplined and should have a long term approach. Start investing early and allow your money to grow (stay invested for the long term). Now the question is how to make the most out of your SIP. This can be done by increasing your SIP amount whenever you get a salary raise. Many Mutual Fund houses provide you with SIP top up feature. This feature allows you to increase SIP investments systematically with an increase in income without too much hassle.
Top-up is an SIP facility through which you have the option to increase the amount of the SIP installment by a fixed amount at pre-determined intervals. Most funds don’t allow you to modify top-up amounts once you sign up, so use them wisely.
Apart from all this, remember to review your funds at least once a year. Compare your fund to its benchmark and check if it is underperforming. Compare the fund to its peers as well as to see if it is on par. You might need to replace funds that have been underperforming for over 2 years. You can have a shorter review period if there are certain events that warrant the same. These events include a change in the mandate of the fund, change in fund manager and merging of fund houses.
But note that just because these events have happened, you don’t need to change the fund unless it has become an underperformer. Another rule to remember is that SIP in a debt fund might not yield great returns in the long run. When you invest in a debt fund through SIP for over 3 years your returns can be hit by inflation. Your best bet would be a balanced fund. Always use the help of a good financial planner who can choose the right funds for you. It is also prudent that you book profits in equity funds whenever you earn more than your estimates.
Additional Reading: Why You Should Keep Your SIP Investment Simple
- Starting with a good corpus
If you are starting with a good corpus, you have an edge over others wherein you could reach your goals quicker than someone starting from scratch. But you must exercise caution when deploying your corpus. Capital preservation is an important goal for those who already have a big corpus.
So, choose investments wisely and most importantly keep track of them on a regular basis. So apart from the above-mentioned investment options like RD, you could choose the below routes for deploying your funds and increasing your savings.
- Monthly Income Plan (MIP)
MIPs are typically debt-oriented funds with a bit of investment in equities for higher returns. Unlike its name, an MIP doesn’t guarantee you a monthly income. However, it might give you better returns than FDs. Also, if you are in the highest tax bracket, taxes on MIP earnings would be much lower than the tax on FDs. So, if you have a good corpus which you don’t want to invest right now, put it in an MIP.
An MIP is the best way for a lay investor to move from savings to investments. MIPs with growth option are the best for accumulating or preserving your corpus. Also, choosing dividend options would result in you paying higher taxes. Since 2013, these funds have been subject to dividend distribution tax of 25%. With surcharge of 10% and cess, the actual rate comes close to 29%. So, when you choose MIPs, think it through.
- Systematic Transfer Plan (STP) – STP is similar to SIP wherein you can transfer amounts from one fund to another over a period of time. You can transfer money from a liquid fund or MIP to an equity fund or if you are going to reach your goal, transfer from an equity fund to a debt fund to safeguard your profits. This is especially useful to those who have a corpus.
You can put your money in debt funds and do an STP to equity funds ensuring that you earn money from your corpus while gaining exposure to higher risk/higher return funds. You can even set it up in such a way that it acts on triggers. For example, you can set up a trigger where when the markets go down by 1%, you move 10% of the money from the debt fund to the equity fund. This would help you make the most of market downfalls, ensuring that you don’t enter the market at highs. And there are several STP plans offered by MFs. You can also decide the amount that needs to be transferred and the frequency of such transfer.
Additional Reading: If You Want To Invest Lump Sum Amounts, STP It!
Whatever be your plan, it is important to stick to it for your money to grow. It is also crucial that you keep a tab on your investments as your money grows so that you can book excess profits and put them into lower risk investments.