How much you need to save every month depends on your goals and not the other way round.
Some people have this fascination for what percentage of their income they save and invest. To be fair, it’s not wrong to look saving and investing from that angle.
Then, there are also some commonly doled out yet unsolicited thumb rules such as ‘save at least 10 or 20 per cent of your income.’
These rules or mental hooks are no doubt handed down in good spirit. But often, just sticking to a popular thumb rule isn’t enough.
Let’s see why.
Assume we are talking here about the ‘Invest 20 per cent of your income’ approach.
Save according to goals
Now, you may have goals such as saving for children’s education, their marriage, your retirement, house purchase (down-payment part of it), and what not. Right? Everyone’s life situation is unique: i.e., their goals, age, income (and its stability), family situations, number of dependents, etc. differ.
Suppose you and your spouse earn a total of Rs 2.5 lakh a month. You are part of a six-member family (you, spouse, two kids and both parents). Like all regular families, even you have certain living expenses every month. In your case, let’s say the amount is Rs 1.9 lakh per month.
Now, if you have this notion that saving 20 per cent of your income was good enough for you. So, in your case, 20 per cent is Rs 50,000 (i.e., 20 per cent of Rs 2.5 lakh). Since your expenses are Rs 1.9 lakh (and surplus is Rs 60,000), it’s easily possible for you to achieve a 20 per cent savings rate.
Let’s talk about your goals and their monthly goal-based investment requirements. These are indicative figures and would differ across cases.
-Elder daughter’s education: Rs 25,000 per month
-Younger daughter’s education: Rs 15,000 per month
-Your retirement: Rs 25,000 per month (over & above EPF contributions)
-Daughters’ marriages: Rs 20,000 per month
-House down-payment: Rs 20,000 per month
This totals to Rs 1.05 lakh a month. On a monthly income of Rs 2.5 lakh, that is about 42 per cent.
You will need to set aside more.
You were comfortable (and happy) saving 20 per cent of your income, i.e., Rs 50,000-60,000 per month. But given your financial goals, you need to save Rs 1.05 lakh per month. So, you are not on track to meet your financial goals in your chosen timelines (or budget).
Please don’t get me wrong. I am not saying that saving 10 or 20 per cent every month is wrong. All I am trying to highlight is how much you need to save every month depends on your goals and not the other way round.
For those who are saving next to nothing, the thumb rule of saving at least 10-20 per cent is a good start. In fact, it is necessary.
And once the savings rate of 10-20 per cent is achieved, it’s best to find out how much exactly you need for each of your financial goals. You can do it yourself (if you think you are a skilled DIY investor) or you can take help from capable fee-only financial planners.
Of course, it eventually comes down to whether you can actually save the required amount (proportion) or not. And it will depend on your current life stage and responsibilities. If you have several immediate financial responsibilities, then obviously the savings rate will be lower. And if you can save what is required, then good for you. But if you can’t, then you need to prioritize your goals, review the target and the timelines. It’s possible that such a goal-review exercise might help you decide if there are some low-priority goals that you can postpone for the time being.
And make sure that while reviewing goals and investments, you keep retirement separate from other goals. Retirement savings deserve that degree of importance.
Another aspect of having lower expenses is that you can save more. It sounds simple, but that is the secret of early retirement (and financial independence) if that is something you aim for.
Some people have this fascination for what percentage of their income they save and invest. To be fair, it’s not wrong to look saving and investing from that angle.
Then, there are also some commonly doled out yet unsolicited thumb rules such as ‘save at least 10 or 20 per cent of your income.’
These rules or mental hooks are no doubt handed down in good spirit. But often, just sticking to a popular thumb rule isn’t enough.
Let’s see why.
Assume we are talking here about the ‘Invest 20 per cent of your income’ approach.
Save according to goals
Now, you may have goals such as saving for children’s education, their marriage, your retirement, house purchase (down-payment part of it), and what not. Right? Everyone’s life situation is unique: i.e., their goals, age, income (and its stability), family situations, number of dependents, etc. differ.
Suppose you and your spouse earn a total of Rs 2.5 lakh a month. You are part of a six-member family (you, spouse, two kids and both parents). Like all regular families, even you have certain living expenses every month. In your case, let’s say the amount is Rs 1.9 lakh per month.
Now, if you have this notion that saving 20 per cent of your income was good enough for you. So, in your case, 20 per cent is Rs 50,000 (i.e., 20 per cent of Rs 2.5 lakh). Since your expenses are Rs 1.9 lakh (and surplus is Rs 60,000), it’s easily possible for you to achieve a 20 per cent savings rate.
Let’s talk about your goals and their monthly goal-based investment requirements. These are indicative figures and would differ across cases.
-Elder daughter’s education: Rs 25,000 per month
-Younger daughter’s education: Rs 15,000 per month
-Your retirement: Rs 25,000 per month (over & above EPF contributions)
-Daughters’ marriages: Rs 20,000 per month
-House down-payment: Rs 20,000 per month
This totals to Rs 1.05 lakh a month. On a monthly income of Rs 2.5 lakh, that is about 42 per cent.
You will need to set aside more.
You were comfortable (and happy) saving 20 per cent of your income, i.e., Rs 50,000-60,000 per month. But given your financial goals, you need to save Rs 1.05 lakh per month. So, you are not on track to meet your financial goals in your chosen timelines (or budget).
Please don’t get me wrong. I am not saying that saving 10 or 20 per cent every month is wrong. All I am trying to highlight is how much you need to save every month depends on your goals and not the other way round.
For those who are saving next to nothing, the thumb rule of saving at least 10-20 per cent is a good start. In fact, it is necessary.
And once the savings rate of 10-20 per cent is achieved, it’s best to find out how much exactly you need for each of your financial goals. You can do it yourself (if you think you are a skilled DIY investor) or you can take help from capable fee-only financial planners.
Of course, it eventually comes down to whether you can actually save the required amount (proportion) or not. And it will depend on your current life stage and responsibilities. If you have several immediate financial responsibilities, then obviously the savings rate will be lower. And if you can save what is required, then good for you. But if you can’t, then you need to prioritize your goals, review the target and the timelines. It’s possible that such a goal-review exercise might help you decide if there are some low-priority goals that you can postpone for the time being.
And make sure that while reviewing goals and investments, you keep retirement separate from other goals. Retirement savings deserve that degree of importance.
Another aspect of having lower expenses is that you can save more. It sounds simple, but that is the secret of early retirement (and financial independence) if that is something you aim for.
Happy Investing
Source: Moneycontrol.com
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