Start saving from your first job onwards
Remove a portion of earnings at the start of the month from the salary account to an investment account to reduce chances of misspending
Sandeep Ganesh, who graduated from the Indian School of Business and now works for a leading management consultancy in Mumbai, admits that despite earning a handsome salary, he manages to save less than he would like to.
About 30 per cent of his net salary goes on account of his education loan, 30 per cent is spent on paying rent, and regular expenses take care of 10 per cent. Of the remaining 30 per cent, 20 per cent or more is spent on what he terms “lifestyle expenses”. So, in any given month, he saves 10 per cent or less.
Ganesh says two things are responsible for his generation’s inability to save adequately.
“Our parents are financially independent, so we do not have to support them. Also, lifestyle inflation has taken a toll on savings,” he says. Areas where expenses have escalated include travelling by cab; eating out or ordering food online; holidaying abroad; splurging on gadgets; and buying clothes round the year. Experts concur with this. Says Nitin Vyakaranam, founder and chief executive officer, Arthayantra: “Our data shows that the savings rate has gone down primarily because the spending rate has gone up.”
Today (October 30), which is World Savings Day, youngsters especially need to think of strategies to save and invest more. With careers becoming more volatile and truncated, a high savings rate has become imperative.
Before you save, you need to pay off debts. Earning single-digit returns from fixed-income instruments while paying double-digit interest rates on personal and credit card loans does not make sense.
Not prepaying a loan and instead deploying the money in equities is also not advisable. “That you will have to repay part of your loan over the next year is certain, while equity returns over the next year are by no means certain, so you cannot compare the two. And it is not possible for any liquid, low-risk investment to generate higher post-tax returns than the cost of a loan,” says Avinash Luthria, an investment adviser registered with the Securities and Exchange Board of India, and founder, Fiduciaries.
He suggests the following steps before you begin to save and invest. One, put a month’s expense in the deposit of a quality commercial bank to meet medical emergencies. Two, pay off all high-cost loans. Three, set up an emergency fund equal to 6-18 months (depending on risk appetite) of expenses to handle eventualities like a job loss. Four, repay education loans and then secured loans like a car and home loan.
As for how much you should save, suggestions are in the range of 30-50 per cent of take-home salary. Luthria says: “Use half your post-tax salary to meet expenses and the other half to pay off education and other loans. Once you have done so, save and invest this half.” He admits the young will find it challenging to achieve this level, so he suggests they should not increase their expenses until they hit this mark.
Don’t wait till the month’s end to invest what is left. Instead, transfer a portion of your salary right at the start from your salary account to a designated investment account. Compartmentalising reduces the chances of misspending. Automate processes. If you rely on doing things manually, there is the risk of missing out.
Besides mutual fund SIPS, you may use the Voluntary Provident Fund (VPF) to save over and above the 12 per cent of the basic salary you contribute to the Employees Provident Fund to increase enforced saving.