In our last topics, we had discussed the power of compounding and options available to invest our money. Now the obvious question that arises is how to save money as each one of saying that I am already running on a tight budget with hardly any scope of savings.
In this topic we will discuss how to save money for investment.
1. Pay yourself first –
The moment you receive your earning either from salary or from business, the first thing that comes to your mind is the payments that you have to make with this amount. This may include payment of bills, debt, grocery, household expenses etc. Then there comes payment for your wants like for new clothes, shoes, movies, parties etc.
And now after doing all these stuff you think that if some amount is left from earning that may be invested. But in almost all cases, this amount is zero and in some cases you have to opt for short term credit (like credit cards) to keep thing moving for the month.
The same cycle is repeated every month without any amount being saved or invested.
The solution to this problem is simple which involves making a habit of paying yourselves first. Treat yourself as a third person just like you do for any other mandatory expenses like bill, EMI or grocery. But the thing which is very important is that you must keep yourself first above everything. Decide an amount (Ideally at least 10%) from your monthly income and pay it to yourself (Keep it aside) and then strict to maintaining the routine like your have been doing earlier. Definitely this will be a slightly painful affair in the beginning but you will get used to it in a period of 2-3 month.
Now the amount that you have paid to yourself (kept aside) is ready to be invested. This is how you can start saving and investing.
2. Controlling impulsive spending –
Remember last time you had gone to the market and bought those new pair of shoes or any other such item, even though there was no need of buying as you may be having it already. Or you would have simply done that because there was a discount sale going on in the market. This kind of spending is called impulsive buying when we spend on something without thinking in a prudent manner. The decision is normally taken in few moments and buying and spending is done instantly.
This type of spending must be curbed if you are serious about monthly budget and savings.
3. Repayment of bad loan –
Good debt means borrowing money to acquire assets or for skill devlopment. With this kind of debt you will buy something which will increase in value or generate money for you over a period. Some of the examples are, Home loan, Education Loan and Business loan.
Bad Debt means borrowing money to acquire something that would depreciate with time. Some of the examples are Car Loan, Credit card debt, personal loan and consumer loans.
Normally Good debts are taken to fulfill the necessities in life whereas bad debts are taken to acquire luxuries in life. Moreover it has been observed that interest rate on Bad type of loan is higher than that on good type of loan.
In the quest of saving money and investment you must try to avoid taking bad type of loan or must try to pay them at the earliest so that you have more disposable income in your hand which can be used for saving.
4.Emergency fund –
Your saving journey must start with building for emergency fund as nobody knows what lies ahead in future. Therefore it is always better and safer to be in preparedness for all kind of life situations.
We always have a basic idea that what is our monthly budget for necessities like, grocery, utilities, education and medications; the rule of thumb is to put away at least three to six months’ worth of expenses. This will be of great help in case of unforeseen events like job loss, business failure, medical emergencies etc.
The emergency fund must always be liquid and hence should be parked in such an in such an instruments which is easily accessible and can be withdrawn instantly if need be.
5.Summary – The secret of starting to save money primarily lies in your willingness to start acting on this matter. For example if you save only 10% of your net income by paying yourself first for 10 months, in the 11th month you will have one month’s earning by your side. When you put this amount to work for you by investing in any income generating instrument your income increases and so does your net worth. Once you have started the above practices, things will begin to move in desired direction. It also important to invest our saved money wisely for different life goals and keep watching it growing and making future a lot easier.
In the above points we have explored different options for starting journey of savings, we will discuss about other aspects of financial life.