How to increase your savings
Everyone seems to running on a tight budget, irrespective of whether they are earning an annual salary of Rs. 1 lakh or Rs. 1 crore, thanks to the need for a better lifestyle and increasing inflation. If you didn’t know, for those in the highest tax bracket, one-third of their salary goes away in taxes, another third is eaten away by expenses while the remaining is the only part that is saved, if there are no contingencies. So, if you want to save more in the long run, it is essential that you strive to increase your savings whenever you can. Here are ways you could save.
Use those hikes
Every year you might receive salary hikes. The biggest mistake people make is enhancing their lifestyle and keeping their investments intact when they start earning more. If they need to really increase the rate of their savings along with the increase in their income / salary, they need to use their hikes to invest more. This is the easiest way to enhance savings over time. So, whenever you get a hike, increase the amount you put in your mutual funds as lumpsum or using the Systematic Investment Plans (SIP). You could increase your monthly recurring deposits (RD) along with that of other regular investments.
People tend to forget things when it is not mandatory unless it’s something like paying bills. This is the reason why automating your savings and investments is the best way forward. For instance, let’s say you manually invest in fixed deposits after the 15th of every month. You might forget to invest or put in a lower amount than intended or use the funds for some other expenses as they might be in your savings account. This will lower your savings over time. To avoid this, you could use auto sweep-in accounts or give auto-debit instructions for your deposits. You can do that for your mutual funds too. Note that when investments become regular and automatic, it will help in creating a good amount in the long run.
Cut investing costs
Every investment involves costs. This includes deposits, stocks, mutual funds, among others. You need to keep a tab on investing costs so that they don’t might eat into your actual investments. Higher costs might lead to you investing lower amounts than intended. For instance, if you are using the services of an online brokerage, review your brokerage plan at least once a year. Also, choose a plan based on your trades and when trading, choose financial products that will cost you less. For mutual funds, choose direct plans that will cost you less than regular funds. But remember to take the advice of an expert before your choose your fund, and periodically to rebalance your funds.
Invest more after loan repayments
You might take loans for several purposes such as purchasing a car or a house. When you pay back the loan, you will have excess cash in hand. Instead of spending that money, you could save a part of that money every month as if it were a loan commitment. This might sound very tough and you might be tempted to dip into the funds. However, diligence on your part will help you save a big amount over time.
Do some budgeting
When you make purchases such as consumer electronics or household appliances, draw a budget. If you are able to purchase those items at prices lower than the allocated budget, don’t use the extra money to splurge on other consumer products. You could deposit the money into your savings account or invest it in a financial product.
Lower loan costs
For most individuals, major expenses every month might be their Equated Monthly Instalment (EMI). Usually high EMIs are because of high interest rates. You could reduce your EMI if you choose a floating interest rate option that’s in line with market rates. You could also consider putting in more money to close the loan earlier or shift your loan to a lower cost one after you assess the costs of doing so.
Wait it out
As you might know, long term deposits earn higher interest rates than short term ones. So, when you invest in deposits choose longer tenures. This will help you earn higher income and also ensure that you don’t dip into the funds because of the penalties. You could invest for the long run in equities too as they provide inflation beating returns only if the investment is over five years.
It is important to invest windfalls such as your annual bonus, incentives and inheritance. However, you need to plan them well. The higher the amount, the more careful your planning needs to be. Lower amounts might go into your deposits. For significant amounts you must invest in equity and debt for the best returns.
Plan for cutting taxes
Taxes are your first expense. Without proper tax planning you might end up losing a lot of your hard-earned money.
Both the stock and the debt markets entail high volatility which means fluctuating returns. Take the present scenario. The Sensex has come back after falling significantly at the start of the year. But the stocks are at the same level as what it were last year. Hence, always have conservative estimates for your investments. Also, higher return expectations from investments could lead to lower accumulation of savings. You might not be able to meet your goals because of lack of funds. Always keep your expectations realistic. If the returns exceed your expectations, sell some of your investments and put them in safer avenues.
Even though general inflation is on the decline, you should always consider inflation while investing for the long run. Without inflation estimates, you might find that your savings are worth much lesser than what you thought.
Always review your investments to weed out underperformers, if any and check if you are saving enough to achieve your life goals.
Need help with investments? Reach out to your consultant at Wealthzi.com.