Start with your goal in mind
The key to enhancing savings is to have clarity on your goals and the financial implications thereof. For example, if you intend to retire with a corpus of Rs3cr, or if you intend to send your daughter abroad for higher studies, you need a lot of money on hand after 20 years. Once you know the target, you can work backward and save accordingly. Your financial goals give direction to your savings. If you don’t know where you want to reach, it will not matter how fast you actually run.
Savings must be targeted not residual
This is the most important aspect about enhancing your savings. For example, if your income is Rs1 lakh and your expenses are Rs90,000, you are saving Rs10,000 per month. Here, the assumption is that you cannot reduce your expenses, which is normally incorrect. The best way is to determine your target monthly savings based on your goals and then look to improve the savings level.
Make savings an automatic process
Saving money in fits and starts is one thing. If you want to save for a big corpus then you need to make savings a discipline. That means, it must be automatic. An instruction to your bank to deduct a specified sum and transfer into a long term FD is a discipline. Similarly, a systematic investment plan (SIP) in a mutual fund is an automatic process and forces you to save. You can enhance your savings automatically by opting for a stepped-up SIP. That way your savings automatically increase in sync with your income levels.
Regularly review your spending patterns
This is an important aspect, and here we must appreciate that Indians tend to be extremely creative in cutting costs. For example, you may be driving to office whereas the metro may be more convenient, efficient and economical. You may be spending too much eating outside, whereas healthy home food should work better. Your grocery bills can be cut by 25% each month by ordering your home needs online. There is no reason for you to prefer offline shopping. Regular reviews of spending patterns can enhance overall saving capacity.
Don’t blow up your bonuses and windfall gains
Most of us are instinctive shoppers. We tend to believe that any windfall inflows are meant to indulge ourselves. While some indulgence is essential, don’t blow up your entire bonus or windfall gains in conspicuous consumption. The discipline must be that 50% of any windfall gain or bonus will be used to create long term assets. In case you want the power of compounding in your favour, you can even use Systematic Transfer Plans (STP). The lump-sum amount can be parked in a liquid fund and a fixed sum can be swept into equity funds each month. This enhances value of savings and also ensures rupee cost averaging.
Prefer favorable EMIs to unfavourable EMIs
Let us start with a practical problem that most young savers and investors face today. Despite earning good salary packages, most of them end up with inadequate savings. The reasons are not far to seek. If you carry a string of credit cards in your wallet and end up paying 35% interest on these cards, you will never save or invest enough. The best equity funds can give you 14-15% returns over the long term. That means, you can never beat the cost of credit cards and personal loans. This has two implications. First, it is OK to have a loan for your home or for your car because you are creating an asset. To the extent possible, keep personal loans and credit card outstanding at the bare minimum. Secondly, when you plan a big expense like a foreign holiday or buying expensive assets, use mutual fund SIPs to plan for them rather than taking a loan and repaying EMIs. Smart savings is all about letting good EMIs win over bad EMIs.
There is no rocket science about enhancing savings. Keep a tab on your loans and make savings a habit and a discipline. The rest will follow!