• HDFC
• 01 Dec 2018
• Personal Finance

HDFC, Tester

How much to save? Most of us ponder over this question time and again (usually when you want to splurge). The simple answer is: save as much as you can. Everyone makes a different amount every month. They also have different financial obligations. So, one set of rules may not work for everyone. As a common practice, most people start by saving 10% of their net income and gradually increase it to 20-30%.

Although this is an easy, uncomplicated way of saving up it may not be a 100% effective. Often times, when the income increases, people may forget to increase the savings/investment percentage. Also, rise in income is directly proportional to your living standards – a rise in income is often accompanied by increase in your standard of living. It’s easy to fall in expense trap: as income increases your standard of living increases largely.

 

Nevertheless, here are some tips for saving!

 

Start small: Start with 10 percent of your income and gradually build on that as and when possible. In this way, you at least set aside some portion of your income and develop a habit of saving.

 

Give your savings a purpose: Saving is often easier when there’s an end goal in sight. With this method, you can set aside enough money for different purposes and goals whether it is a new gadget or a vacation.

 

Let your savings affect your lifestyle: This is a good way of ensuring that you’re saving more than you are spending. The more you save, the lesser money you have to spend on things you may not require.

 

How to adjust when your income grows

It’s great when you get a raise. Your first instinct is to splurge and start checking things off of your wish list. This may be satisfying but prove to be detrimental to your savings’ growth. So, pay yourself before you start spending. When you adjust your lifestyle upwards, you risk becoming spending all or most of your raise and lose out on opportunities to enhance your financial security. Here are some ways to incorporate your raise in your savings habit.

 

Set up an Emergency Fund: Create an emergency fund to cover at least 6 months of expenses before you spend anywhere else. Emergency Fund trumps paying debts and anything else. Having an emergency fund in place will help you face any kind of financial or medical emergency to some extent.

 

Clear off your Debts: As soon as you have diverted a part of your newly hiked salary to the emergency fund, turn your attention to the debts. The best practice would be to avoid debts completely. However, if you do have some large high-interest debts, pay those off.

 

Account for Inflation: Another important aspect while saving up is inflation. Inflation over a longer time period reduces the purchasing power. Hence, by the time you have enough saved up, your savings or investments might not be sufficient to achieve your goal. This is why you must account for inflation while saving up or investing. The rate of inflation to be considered depends on your individual goal. The rate of inflation for education is different than the inflation rate for housing. Generally, a standard inflation rate of 8% is used for all financial calculations. As an individual's income increases, there is a gradual improvement in lifestyle as well – bigger house, branded clothes, better car. These additional expenses result in what is termed as lifestyle inflation. So the expenses increase not just on account of the rise in prices, but also due to a better lifestyle. Since the rise depends on the individual, it is not possible to fix a number which can be applied to all. However, one must consider it while computing long-term goals, such as retirement planning or children's wedding.