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Saving money is the first and most important step towards building wealth and achieving financial security. As such, you must understand the importance of saving money and getting started early is a good idea. Saving money will ensure that you are able to brave through the inevitable uncertainties of life with relative ease. 

 

Moreover, consistent saving will give you peace of mind and will enable you to live life to the fullest. There are a number of reasons to save, your saving goals will depend on your financial goals and priorities. Saving goals can range from building a comprehensive emergency fund to saving for your child’s education. 

Why Saving Money is Important?

Saving money is important to ensure financial security for you and your family. It allows you to plan for short-term goals such as vacations, building emergency funds and gadgets, etc. as well as for long-term goals such as saving for your retirement, child’s education, etc. 

 

Every individual has unique financial needs and circumstances, hence, the importance of savings for every individual cannot be overstated. The first step towards saving efficiently is differentiating between wants and needs. With increased consumption and aggressive advertising, it can be extremely difficult to differentiate between the two. 

 

However, effectively differentiating between the two will help you save better. Increased discretionary spending leads to lesser ability to save, which in turn leads to lesser financial freedom. 

5 Advantages of Saving Money

The importance of saving money can be attributed to a variety of factors. The top 5 advantages of saving money are highlighted below.

1. Guarantees Consistent Future Security

Enjoying consistent security in the foreseeable future is just one of the many beneficial aspects of saving early. Here, it is generally believed that your financial security is directly proportional to the corpus you have amassed. Additionally, a higher savings provides a safety net that you can always fall back on. Plus it helps you carve out an investment path for better returns which can add stability to your finances. 

2. Paves Way for Financial Independence

Saving money is the first step towards gaining financial independence to spend what you want, where you want without worrying about resources. Your savings corpus eliminates the need of monthly paychecks or salary credited to your bank account. Plus you can easily tackle any or all financial obligations or contingencies with your savings.

3. It Enables You to Take Calculated Risks

Savings allow you to take measured risks without being overly reliant on a monthly income. So, you can make smart decisions with the funds you have saved and feel secure about your finances. You can consider a vast array of options if you set a savings goal and consistently add to your corpus every month or at periodic intervals. 

4. It Lowers Stress Significantly

Saved funds give you an unmatched sense of security and fulfilment. It not only helps you plan your future better but also helps you take care of your family better. With enough funds at hand, you can easily plan your child’s education or wedding, cover medical care in emergencies etc. You no longer have to worry about straining your budget for big ticket purchases or expensive lifestyle products.

5. It Enables You to Profit from Compound Interest

People have actually amassed wealth thanks to the strength of compounding, which amplifies the importance of savings and investment. One of the major benefits of saving is that it enables people to take advantage of compound interest. But the brilliance of compound interest requires patience to manifest. So, if you start saving today and investing it wisely, you can expect to see amazing benefits in the near future.

Tips to maximise your savings

The following steps should be taken if you are new to saving or are having trouble staying committed to your saving goal:

 

  • Control your credit card swipes: Controlling your credit card spendings is a smart way to maximise your savings as the exorbitant interest rates can deplete your funds. Keeping your debt minimum is a surefire way to enhance your savings and financial health. 
  • Maintain an expenditure log: If you struggle to save money consistently, consider keeping a journal of your monthly bills. This will provide you with a comprehensive view of your spending activities. Avoiding unnecessary expenses can help you save more money without overspending much.
  • Plan a savings budget: Having a monthly budget is crucial to establish spending restrictions, and set your monthly savings goals. This allows you to concentrate on what matters, lowers your risk of overspending, and enables you to save as you had intended.
  • Investing in financial instruments with longer tenors: An easy way to watch your funds increase over time is to invest over a longer horizon. A long-term investing strategy might offer numerous added advantages for your portfolio. With high interest rates, they allow you to combat inflation and preserve your money's worth. 

How much money should be set aside for savings and investments?

The importance of savings and investments go hand in hand. Savings are funds reserved in cash or in a bank's savings account. It is the available cash that may be used for short-term or emergency needs.

 

Savings typically yield little profit. Alternatively, investments are the money placed into schemes or bonds that deliver greater returns at maturity or the end of a duration. Every month, you should ideally save about 10% of your income and invest between 10%-15% of your earnings. 

 

Although savings are for the short term but essential to maintain for rainy days. Investments, on the other hand, are for the long haul and help you build wealth to achieve life goals.

How to Differentiate a Want from a Need - Want vs Need?

Any expense that is essential to your survival or enables you to do your job is a need. A need would include rent or home loan payment, education, electricity and other utility bills, healthcare-related expenses, food and groceries. 

 

A need is any expense that you may choose to incur but could technically do without. A need would typically include expenses such as entertainment expenses, dining out, travel and vacation, any non-educational subscription services and new clothing. 

 

To help you understand the two better, consider the table below.

Expenses 

Needs 

Wants

Rent or Home Loan Payment

 

Groceries

 

Dine-ins and Take-aways

 

Electricity Bills

 

Educational Expenses

 

Health Insurance

 

Netflix/Spotify Subscription

 

Childcare Expenses

 

Designer Clothes

 

Gadgets

 

What Should You Save For?

Your saving goals will generally depend upon a variety of factors such as your age, dependents’ ages, life goals, etc. However, a good place to start is building an emergency fund to ensure that the inevitabilities of life don’t set you back financially. 

 

Typically, your emergency fund should be anywhere between three to six months’ income. Additionally, you may also choose to build a short-term and long-term emergency fund. Once you’ve built an emergency fund, you may begin saving money for specific goals such as children’s education, retirement, vacation plans, etc. 

 

Your saving goals would depend upon your priorities and responsibilities in life. If you’re in your 20s, you may want to consider setting a small portion of income aside as retirement savings, however, if you’re in your 40s and 50s, you would ideally want to set aside most of your savings as a retirement fund. 

 

If you’re someone that has dependents, you might also want to save for your children’s education and/or wedding. Other saving goals include saving towards financing a home, funding a move or relocation, purchasing furniture and other home improvement appliances and saving for a car. 

 

You could also be saving money to start a business or invest in an existing business, or even building one or multiple, sinking funds for various discretionary and mandatory expenses. 

 

Different saving goals have different investment horizons based on various factors such as ROI, desired liquidity levels, requirement time frame, etc. Take a look at the following table to understand the time frames for different types of saving goals. 

Type of Saving Goals

Ideal Time Horizon

Emergency Funds

Short to long-term

Education Fund

Medium to long-term

Travel Fund  

Short to medium-term 

Sinking Funds

Typically short-term

Marriage Fund

Medium to long-term

Retirement Savings

Long-term 

How to Save for Your Goals?

As crucial as savings are, it’s important to recognise that saving and saving goals are extremely personal choices. The first step towards making wise, financial decisions is to have an answer to the question, ‘why is saving important?’. The reason offers perspective and aids in decision making.  

 

Once you’ve managed to do so, you will be able to avoid unnecessary expenses and save better. Saving is a great habit to cultivate that will not only help you manage your expenses but also help you in your path towards financial security and freedom. 

 

Here’s a table showing ideal investment options for your saving goals with respect to the rate of interest and risk involved. 

Type of Investment  

Risk Involved 

ROI

Ideal for

Mutual Funds

Low to Very High

Market-linked

Education, marriage, any medium to long-term savings

Gold ETF

Low to Medium

Market-linked

Emergency fund, retirement savings 

Bank Fixed Deposits

Negligible 

Depends on bank

Emergency funds, retirement savings

National Pension Scheme

Low to Medium

Market-linked

Retirement savings, any long-term savings

RBI Bond

Very low 

7.75%

Education and marriage funds; medium term savings

Unit Linked Insurance Plan (ULIP)

High

Market-linked

Medium to long-term saving goals

If you’re early in your career and have no dependents, consider saving as much as you can and invest your savings in ULIPs, mutual funds, equities, etc. to help you grow your wealth. 

 

However, if you’re older and have dependents, choose safer investment instruments such as FDs, post office savings, index funds, etc. for consistent returns and security. Most importantly, it’s never too early or too late to begin saving.

FAQs

  • ✔️How much money should I invest from my monthly income?

    You should invest about 10% to 15% of your monthly income for good returns.

  • ✔️How much risk is involved in investing in mutual funds?

    The risk in investing in mutual funds ranges from low to very high as these are market-linked entities.

  • ✔️How much should I set aside for bank savings?

    You need to set aside about 10% of your monthly income for normal savings.

  • ✔️Which is the best investment option considering low risk?

    Fixed deposits and RBI bonds are the safest investments options for risk averse investors.