Savings Plans For Different Income Groups

Savings plans will be different for different income groups based on their goals. Here are some plans you could consider.

The first thing your mom or dad would have told you when you started earning was to save. You opened a Savings Account but did you make investments like Fixed Deposits? And did you know that for the best returns you should link those investments to your goals? When you link investments to goals, you can…

• See how much you need for each goal
• Prioritise your savings and investments (put more money to achieve goals that are on the horizon)
• Ensure you have enough money for achieving each goal
• Make sure you don’t dip into goal specific investments. Psychologically, when investments are linked to goals you wouldn’t want to encash them to meet other expenses.

Now that you have decided to link your investments to your goals, let us see how you can reach those goals and where you should invest to reach those goals. This will, of course, be different for different goals. Here, we give you a few savings plans that you could consider.

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Income < Rs. 5 lakhs

Saving for a car – Let’s assume you want to purchase a car in the next few years and need Rs. 2 lakhs for the down payment. You plan to take a Car Loan for the rest. How much do you need to save?

If you want the amount in…

3 years – Invest Rs. 5,000 every month for 3 years at 8%.

2 years – If you have only two years to your goal, you need to invest at least Rs. 7,800 per month (almost 20% of your monthly salary) to get to Rs. 2 lakhs. However, if you want to invest a lower amount every month, you either need to invest in high yielding instruments or stretch your goal. And it is not easy, even if you want to reduce your monthly investments by about Rs. 500. You need to invest in an instrument that yields at least 14%!

If you start saving earlier, you can earn higher returns with less investment.

How? Let’s assume you have 5 years to get your car’s down payment in order. If you save Rs. 6,000 per month for 2 years and stop investing after that you will still be able to reach that Rs. 2 lakhs much before the completion of 5 years. This is assuming an interest rate of 10%.

Additional Reading: Purchasing A Car: Does Buying With Cash Trump Car Loans?

Income between Rs. 5 and 10 lakhs

Down payment for your house – You want to purchase a house a few years down the line and need Rs. 10 lakhs for the down payment. How much do you need to save?

If you want the amount in…

7 years – Invest Rs. 8,000 every month for 7 years at 12%. Since you have many years to reach your goal, it is best to invest in securities that yield higher returns. This will ensure that you invest a lesser amount every month and you can also afford to take higher risks since you have time.

5 years – If you have only five years to your goal, you need to invest at least Rs. 12,500 per month (almost 16% of your monthly salary) to get to Rs. 10 lakhs. This might be tough because there might be other goals and loans that might not allow you to invest that much each month. That is the reason why you must start investing early.

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If you start investing 10 years before you need that down payment? You need to invest just Rs. 7,000 per month for 5 years and even if you stop investing after that, at the end of 10 years, you will have Rs. 10 lakhs. Assuming that the interest earned is 12%, essentially your total investment will be just Rs. 4.2 lakhs if you start investing early. In the other two scenarios (above), you will need to invest Rs. 6.7 lakhs and Rs. 7.5 lakhs respectively to get the same Rs. 10 lakhs.

Income of over Rs. 10 lakhs

Saving for your kid’s education – The best education courses today cost a ton. Imagine what it will be 20 years down the line when your kid is ready for college. Let’s assume you need Rs. 40 lakhs for your kid’s education (the value of a course that costs Rs. 15 lakhs today will cost Rs. 41 lakhs in 15 years assuming an inflation rate of 7%).

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If you need the amount in…

12 years – Invest Rs. 13,000 every month for 12 years at 12%.

10 years – If you have only 10 years to reach your goal, you need to invest at least Rs. 18,000 per month (almost 15% of your monthly salary if you earn Rs. 15 lakhs) to get to Rs. 40 lakhs. This might seem impossible but don’t let this bog you down. Even if you don’t manage to save that much, you can consider an Education Loan. You also have the option of saving early on, like as soon as your child is born.

If you start investing 15 years before you need that down payment? You need to invest just Rs. 10,000 per month for 10 years and even if you stop investing after that, at the end of 15 years, you will have Rs. 40 lakhs. Assuming that the interest earned is 12%. In essence, by investing just about Rs. 12 lakhs in 10 years, you will get Rs. 40 lakhs in 15 years. In the other two scenarios above, you will need to invest Rs. 18.7 lakhs and Rs. 21.6 lakhs for getting the same amount.

The benefits of starting early are obvious. Ideally, you should start investing as soon as you start earning. But it’s never too late. Why not start now?