If you’re trying hard to save money but you’re finding it hard to do so, then here’s a simple way to plan your savings.
No matter how hard we try to save money, many of us still fail at saving enough. If you find yourself in a similar pickle, then this article is for you. We’ve identified the reason for your failure to save money and also listed a few conventional ways to save money systematically.
For starters, let’s understand why you fail to save enough even though you’re putting away a decent chunk of money every month in a Savings Account. The reason is that saving huge chunks of money without specifically stated goals doesn’t usually work. Without specific goals, you can never measure if you are saving enough or not. Also, there are chances that you may give up on saving altogether.
Additional Reading: Savings vs. Investments: Do You Know The Difference?
However, the solution is simple – save for specific goals. We’ve identified that there are only four different kinds of goals that one needs to work for – long-term goals, short-term goals, immediate needs and building an emergency fund. Then you just have to allocate your income into these four buckets. Lastly, fix a particular amount for each of the buckets. Ensure that you change the amount assigned to each bucket every time your income increases.
Now let’s discuss each of the four buckets, how much money you should be putting in them and the best options to invest your money to meet each of your goals:
Bucket 1 – For your long-term needs
This is the bucket that comprises all your goals that are at least 10 years away or more. These goals include building a comfortable retirement nest, saving up for your child’s education and marriage, or even paying off your existing loans.
You need to be disciplined and have a fool-proof investment strategy that stretches over a period of time to meet your long-term financial goals. The only challenge here is determining the amount of money you should be saving for your long-term goals. This is because of the time frame attached to these goals.
Like, for instance, prices of commodities or education cost (for that matter) are on the rise. So, you’ll only be able to vaguely guess how much your living expenses will be or how much your child’s education will cost in another 10 to 15 years. But, of course, you can be certain that it will be quite high!
Bucket 2 – For your short-term needs
In this bucket, you’ll be putting aside a portion of your income to meet your short-term expenses. Short-term in this case refers to a period of five to seven years, or lesser. Common examples of short-term goals are buying a house, buying a new car, paying off your Credit Card dues, home renovation, etc.
When it comes to short-term needs, unlike your long-term goals, it is easier to forecast the expenses to an extent. Hence, the focus here should be on prioritising your short-term needs and establishing a time frame for them.
Additional Reading: Top 3 Short-term Investment Options For 2016
Bucket 3 – For your immediate needs
A major portion of your monthly income will go into this bucket, which caters to your day-to-day needs. Immediate needs not only include your monthly rent, grocery, utility bills, etc., but also some inexpensive yet important purchases such as a mixer-grinder or new school uniforms for your kids.
It’s pretty simple to set aside money for your immediate needs with a budget. List out your monthly expenses and add a little extra to this to cater to miscellaneous expenses.
Bucket 4 – For the rainy days
Along with your immediate requirements, you should put aside a small sum for unexpected emergencies. A layoff, a medical emergency, a critical accident – these can happen anytime, anywhere. And you’ll need financial backup during these rough times.
Many people ignore creating an emergency fund and usually end up regretting their decision when faced with a serious situation. So, if you don’t want to be running from pillar to post looking for ways to pay for life’s unexpected surprises, you better get your emergency kitty in place.
Wondering how much you need to save as a contingency fund? Experts recommend at least three to six months’ worth of expenses. After all, you’ll need a decent cushion to face the curveballs that life throws at you.
Now that you have a good idea of the buckets that you would be putting your savings into, you’ll have to choose the right investment option for each of the buckets. Don’t fret now! We’re here to help you with it. Let’s begin:
Bucket 1 – Equities
With long-term investments, you should choose an investment option that takes advantage of time and provides you high returns. Mutual Funds are the best choice for this investment. Why? Mainly because if you invest in Mutual Funds over a long period of time, they are likely to beat inflation and provide you with good returns.
With diversified Mutual Funds, you can create a good amount of wealth in 10 to 15 years. However, you’ll have to get the right mix of funds (large-cap, mid-cap, and small-cap funds) and monitor their performance at regular intervals too.
Bucket 2 – Debt Funds
For your short-term goals, you should invest in Debt Funds. Since the time frame is short (just a few years), you wouldn’t want to risk your money in the highly volatile fund market. So, the less volatile Debt Funds are the best vehicle of choice.
These funds provide steady returns, although they may be lower than returns from equities.
Bucket 3 – Savings Account
Put the money required for your daily expenses in a Savings Account.
Savings Accounts are easy to operate and easily accessible too. You can use your account-linked Debit Card to withdraw cash whenever you need. They also provide decent returns as well.
Bucket 4 – Liquid Funds, Fixed Deposit
The best options to store your emergency fund are Liquid Funds and Fixed Deposits. Not only can you easily access your money, you also get decent returns on your investments too. Although breaking your Fixed Deposit may require a little time, Liquid Funds, these days, let you move your money back and forth easily.
Additional Reading: Liquid Funds or Savings Accounts – The Liquid Funds Perspective
Tip: Choose your investments wisely. And always try to invest in at least a few tax-saving schemes.
In short, the only way you can secure your finances is by taking the effort to identify your financial goals and plan your savings accordingly. Got any different ideas or opinions? Drop them in the comments section below.