Whenever the topic of personal finance comes up for discussion, most of the focus is on investment and doubling or tripling the money within a certain time frame. But little attention is given to savings and expense management.
In reality, investments and portfolio building can only happen if you have built-up savings and continue to save a small part of your income every month.
Savings are also critical if you want to pay for special occasions such as a holiday at an exotic location or the makeover of your house without cutting down on essential expenses or breaking into your retirement fund.
Just as little drops of water make a mighty ocean, saving a rupee at a time will grow into a small fortune. And conversely, beware of little but recurring expenses as they can wreck our budget and our ability to save.
However, it can be a little tough to save, given all the interesting products in the malls and high streets. The good news is that you can raise your savings greatly by tweaking your spending habits. Here are five ways to save money and stay on course:
1. Prepare a budget. Just like quality control starts with taking measurements, savings and investment starts with counting your income and expenses every month. In other words, prepare a monthly budget so that you know how much money or cash comes into your bank account and where it goes every month.
A sheet with a list of income on one side and all the expenses on the other side will tell you what you can do differently to cut spending without sacrificing the fun.
Divide the expenses into two categories – essentials and non-essentials (discretionary). The essentials will include house rent, EMIs on loans or school fees and utility bills while flexible or discretionary spending will include fine dining etc.
Think how much you can save in the flexible category without cutting down on your happiness or well-being. For example, you may want to cut down on clothes or simply reduce the frequency of shopping. You may also want to cancel subscriptions and memberships that you no longer use.
2. Plan your shopping. One of the best ways to reduce expenses and increase savings is to lower the cost of essential shopping such as groceries and food. One way to do it is to buy a month's worth of supplies in one go from the wholesale markets. The prices in wholesale markets can be 15-20 percent lower than in nearby retail shops, translating into substantial savings every month.
You can club your shopping with friends and neighbours and negotiate down the price even further. If you shop online, then you can time your purchases as per the sale days and make the most of card discounts, cash backs and discount coupons.
3. Save energy and ramp up your savings. Expenses on energy, whether the electricity at home or petrol/diesel bill for your personal vehicle, is most often the second or the third-biggest expense for most urban families in India. Start cutting your electricity bills by switching off lights and fans in rooms and areas in houses that are not in use. Children are a big spoiler here and tend to leave lights and fans on even in empty rooms. Keep a watch on them and teach them the value of power savings.
You can explore the option of replacing your old light and fans with the latest energy-saving models such as LEDs and BLDC fans. Similarly, if you use air conditioners at home you can replace older models with inverter ACs.
If you use a car or two-wheeler for your daily commute, then there are many ways to cut down your fuel bills.
Once in a while use cheaper modes of public transport such as buses and local trains. This can be easily done on lean days on public holidays when it's less crowded.
Public transport is also a good option when the weather is cool and comfortable. If the usage of public transport is not possible then plan your daily commute so that you avoid peak hours when road traffic is high leading to lower mileage. Lastly, you can pool your vehicle with your friends or neighbours and share the fuel cost if the commute route is largely common.
4. Plan your savings. Now that you have sorted the essential expenses and are fully aware of all their nuances, it’s time to make a plan for savings. Make a list of all the things, activities and experiences that you aspire to in future. Break down all these aspirations into short-term (things to do within two years), medium-term goals (two to five years) and long-term goals (five years or more).
Now create a fund for each of these goals and start savings accordingly. For example, you can use short-term savings to pay for a family holiday or buy a home appliance such as a washing machine, dishwasher, big-screen TV or a two-wheeler.
Similarly, a medium-term tenure fund can be used to purchase a new car or remodel your home.
A long-term fund can be used for making a down payment for making a home, or it can be a corpus for your children’s education, wedding or retirement savings. Estimate how much money you need to put into each of these funds every month and build your budget accordingly.
Also Read: Five financial planning tips for women
5. Invest in high-yield bank FDs. Knowing where to put your savings is as important as managing your expenses. A savings account is a convenient and safe place to park your savings but interest rates on saving deposits are very low at 2.5 percent per annum.
As a rule of thumb, interest on your savings funds should be at least as high as the rate of inflation so that you don’t lose purchasing power to rising prices.
So move all your surplus funds to high-yielding bank fixed deposits (FDs) or open recurring deposits and save through them rather than putting money in a savings deposit every month. A savings account should only have the fund that you will need within the next three months and anything extra should be invested in FDs. Divide your funds in various packets to invest in FDs of different tenures such as six months, 1 to 3 years, 3 to 5 years and 5 years and more. This way your money will be growing and you will always have access to funds.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).