Five simple ways to save and grow your money

Savings are integral to most living things on earth. Wild animals save and store food during abundant months to survive harsher months of the year. Similarly, plants produce excess energy when sunlight is plentiful and then store it in the form of starch for use when sunlight is not enough

Similarly, farmers save or set aside a part of their crop every year as seed to be planted next year. This ensures that they have a harvest year after year. Savings are even more important for salaried people who have to plan for big-ticket expenses such as buying a house, car, furniture, holidays, children's education, marriage and most importantly retirement when they won’t have a salary income.

That’s why it's essential to save a small portion of your income every month to create a corpus that can take care of big-ticket expenses and even pay for necessary expenses during financial emergencies.

However, simply accumulating money in a savings account isn’t enough. This is because we also need to be mindful of inflation and the constant rise in living expenses that it causes. To protect the purchasing power of your savings, you need to save in a way that its value should grow at least as fast as the inflation rate in the economy. To achieve this, you need to plan and build a portfolio that not only beats inflation but grows your corpus over time.

If done right, the corpus will ensure a comfortable retirement and help you achieve your financial goals. Here are five simple strategies to save, invest, and grow your money over time.

1.  Avoid relying too heavily on savings accounts

If you’re serious about creating a long-term corpus then limit your reliance on savings accounts and invest in a diversified portfolio of assets such as equity, gold and real estate besides bank fixed deposits. This involves making strategic decisions about where to save and invest your money. While keeping funds in a savings account is convenient and provides liquidity, returns are generally lower than inflation and your money continues to lose its purchasing power.

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With current interest rates ranging between 2.75 percent and 4 percent depending on the bank, the interest earned on savings deposits doesn’t even keep pace with the current retail inflation rate, which is around 6 percent.

This situation causes the money in your savings account to lose purchasing power at an annual rate of nearly 3 percent. Over a decade, this could result in a 35 percent reduction in your savings’ purchasing power due to the compounding effect.

This gradual erosion of wealth is something to be avoided.

2.   Outpace inflation and leverage the power of compounding

 The key rule in saving and investing is to stay ahead of inflation. Additionally, you should aim to benefit from the power of compounding, where this year's gains become the foundation for the following year's growth, creating a snowball effect. To achieve this, invest in assets and financial instruments that provide returns at least equal to the inflation rate in the economy. This might involve exploring unconventional options such as corporate fixed deposits, FDs of non-banking financial companies, or high-dividend-yield stocks.

3.  Start Early for Higher Returns

Generally, younger investors can afford to take more risks with their money, which can lead to higher potential returns. By allocating a larger portion of your portfolio to riskier assets like equities, bond funds, and lower-rated corporate deposits, you can maximize growth. As you approach retirement, it's advisable to shift more of your portfolio to safer, lower-yield investments like bank FDs, post office deposits, and bond funds.

4.   Balancing Fixed Income and Equity

A common rule of thumb is that the percentage of your portfolio allocated to fixed-income instruments should roughly match your age. For instance, if you're in your late 20s or early 30s, fixed-income investments such as fixed deposits and bond funds should comprise only 25-30% of your portfolio.

Direct equity and equity mutual funds should make up 50 to 60 percent, with the remaining portion divided among gold, silver, and liquid assets like savings accounts and cash. 

For example, if you're saving Rs 20,000 per month, approximately Rs 4,000-5,000 should go into bank or post office FDs, debt mutual funds, and bond funds; Rs 10,000-12,000 should be invested in equity through mutual funds or directly; and the remainder should be placed in gold, silver, and savings accounts.

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5.   Stick to Large-Cap and High-Dividend-Yield Stocks

Investing in equities is a popular way to diversify your portfolio and achieve returns that outpace inflation. However, not all stocks are created equal, and poor stock selection can erase years of investment gains in a short period, as seen in the market downturns of February and March this year. To mitigate this risk, focus on high-quality stocks that, while they may grow slowly, are likely to be more resilient during market crashes due to their strong balance sheets.

Additionally, consider high dividend yield stocks. These stocks not only provide the potential for capital appreciation but also offer recurring annual cash flows through dividends. Many large and mid-cap companies are consistent dividend payers, and if you hold onto these stocks for five years or more, the annual dividends could become a reliable source of income. This income can then be reinvested into safer assets like bank or post office recurring deposits, further reducing your portfolio's risk. This approach combines the benefits of higher equity-linked returns with the stability of fixed-income investments.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

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