Why you should target a high savings rate
Why you should target a high savings rate
There are various reasons to save money. Emergencies may arise anytime, for which you would need money. You would also need to set aside money for unexpected happenings, future fallbacks, and all major milestones of your life. Saving money today allows you to enjoy greater financial security in the future. Once you are convinced that you should save money for all these reasons, the next step is to start practising it. Improving the savings rate helps you reach your desired goal with ease.
What is the savings rate?
Savings rate refers to the percentage of money that you save out of your total earnings or gross income. The higher the amount you save, the more money you accumulate for your long-term goals like retirement, children’s higher education, home buying or emergency funds, etc. When it comes to financial planning, the savings rate plays an important role. As you cannot control the other major factors that influence your investment success such as market conditions and investment performance, increasing your savings rate can help you achieve your goals smoothly.
Why is a high savings rate important?
Savings include investments for the long-term like retirement and also for short-term goals. Your financial progress depends on how much you are keeping aside for yourself every month. The savings rate is something that you can have complete control over by managing your expenses or by boosting your income. Hence, it is important to pay more focus on savings rate than just paying attention to how the market is performing. Thus, a high savings rate can be extremely important for your investment success and to maximize the wealth over the long term.
To understand the importance of a high savings rate, it is crucial to know how the savings rate is calculated and how it impacts your long-term goals.
Savings rate calculation
The savings rate is calculated by dividing your monthly savings amount by your gross monthly income. The amount that you save after all your expenditure including the tax outgo from your gross monthly income decides the rate of your savings. For example, your gross income for the month is INR 2,00,000 and you set aside INR 35,000 every month for savings/investment. Now, let’s calculate your savings rate.
Savings rate = Monthly savings amount / Gross monthly income
= INR 35,000 / INR 2,00,000
= 17.5%
Now, let’s see how your savings rate impacts your financial journey. Let’s say you are saving for your retirement goal. Two factors that we always consider for retirement planning are the time frame and the rate of return expected out of an investment option. But, the amount of saving that you do or your savings rate contributes more to your retirement planning. Let’s understand this with an example. Let’s say you are saving INR 20,000 towards your retirement out of your gross monthly income of INR 2,00,000. This means, your savings rate is 10%. If you invest 20,000 in a systematic investment plan for 25 years for retirement, it can build a corpus of INR 3.79 Cr at a 12% expected rate of return. Now, if you increase your savings rate to 15%, i.e., 30,000 invested in a systematic investment plan for 25 years, it can build a corpus of INR 5.69 Cr at the same 12% expected rate of return. With a high savings rate, you can maximize your investment success.
Tips to maximize your savings rate
The following are some of the important tips to improve your savings rate:
- Set a target savings rate
Setting a savings rate should be the first thing before you even start with a spending plan. Instead of saving the extra money that is left after spending, it’s better to decide the amount that needs to be saved before you even plan your monthly budget. Once you set the target savings rate, you can trim your spending accordingly. For example, you decide to follow a simple 50/30/20 rule, wherein 20% of your income should be put aside for savings. You can save more if you want, but not less. Maximum of 50% towards necessities and 30% for other expenses. When you have this plan in place, you can create a budget accordingly.
- Automate your savings
When you automate your savings, a certain percentage of your income automatically gets saved even before you plan to spend it. Automatic savings options are many such as systematic investment plans, bank recurring deposits, etc. You can seek expert help to plan your finances based on your financial situation, future goals, risk-taking ability, return expectation, and time frame.
- Boost your income
You can increase your savings rate just by cutting down on spending habits. You can also do so by boosting your income. Earning more is also a great way to save more money. Remember to avoid lifestyle inflation as you earn more, then only you would be able to save more. Your skills and earning ability are your greatest asset that can help you reach all milestones in your life successfully.
Seek expert help, create a financial plan and improve your savings rate to maximize your investment success.
Disclaimer
This blog is meant for educating people about the importance of the right financial planning. The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. Consult your financial advisor to get personalized recommendations based on your life circumstances.
About Rajiv Nair
Rajiv Nair co-founded Finshield Investment Advisors after successfully managing several large clients and businesses in the financial services industry for over 15 years. Rajiv is a Certified Financial Planner who believes – ‘Any amount of effort in wealth management is worthless if at least a part of it is not usable within your lifetime’. He is known to be steadfast in his Investment philosophy and an avid reader on diverse subjects. Learn more about him here Rajiv Nair | LinkedIn
There are various reasons to save money. Emergencies may arise anytime, for which you would need money. You would also need to set aside money for unexpected happenings, future fallbacks, and all major milestones of your life. Saving money today allows you to enjoy greater financial security in the future. Once you are convinced that you should save money for all these reasons, the next step is to start practising it. Improving the savings rate helps you reach your desired goal with ease.
What is the savings rate?
Savings rate refers to the percentage of money that you save out of your total earnings or gross income. The higher the amount you save, the more money you accumulate for your long-term goals like retirement, children’s higher education, home buying or emergency funds, etc. When it comes to financial planning, the savings rate plays an important role. As you cannot control the other major factors that influence your investment success such as market conditions and investment performance, increasing your savings rate can help you achieve your goals smoothly.
Why is a high savings rate important?
Savings include investments for the long-term like retirement and also for short-term goals. Your financial progress depends on how much you are keeping aside for yourself every month. The savings rate is something that you can have complete control over by managing your expenses or by boosting your income. Hence, it is important to pay more focus on savings rate than just paying attention to how the market is performing. Thus, a high savings rate can be extremely important for your investment success and to maximize the wealth over the long term.
To understand the importance of a high savings rate, it is crucial to know how the savings rate is calculated and how it impacts your long-term goals.
Savings rate calculation
The savings rate is calculated by dividing your monthly savings amount by your gross monthly income. The amount that you save after all your expenditure including the tax outgo from your gross monthly income decides the rate of your savings. For example, your gross income for the month is INR 2,00,000 and you set aside INR 35,000 every month for savings/investment. Now, let’s calculate your savings rate.
Savings rate = Monthly savings amount / Gross monthly income
= INR 35,000 / INR 2,00,000
= 17.5%
Now, let’s see how your savings rate impacts your financial journey. Let’s say you are saving for your retirement goal. Two factors that we always consider for retirement planning are the time frame and the rate of return expected out of an investment option. But, the amount of saving that you do or your savings rate contributes more to your retirement planning. Let’s understand this with an example. Let’s say you are saving INR 20,000 towards your retirement out of your gross monthly income of INR 2,00,000. This means, your savings rate is 10%. If you invest 20,000 in a systematic investment plan for 25 years for retirement, it can build a corpus of INR 3.79 Cr at a 12% expected rate of return. Now, if you increase your savings rate to 15%, i.e., 30,000 invested in a systematic investment plan for 25 years, it can build a corpus of INR 5.69 Cr at the same 12% expected rate of return. With a high savings rate, you can maximize your investment success.
Tips to maximize your savings rate
The following are some of the important tips to improve your savings rate:
- Set a target savings rate
Setting a savings rate should be the first thing before you even start with a spending plan. Instead of saving the extra money that is left after spending, it’s better to decide the amount that needs to be saved before you even plan your monthly budget. Once you set the target savings rate, you can trim your spending accordingly. For example, you decide to follow a simple 50/30/20 rule, wherein 20% of your income should be put aside for savings. You can save more if you want, but not less. Maximum of 50% towards necessities and 30% for other expenses. When you have this plan in place, you can create a budget accordingly.
- Automate your savings
When you automate your savings, a certain percentage of your income automatically gets saved even before you plan to spend it. Automatic savings options are many such as systematic investment plans, bank recurring deposits, etc. You can seek expert help to plan your finances based on your financial situation, future goals, risk-taking ability, return expectation, and time frame.
- Boost your income
You can increase your savings rate just by cutting down on spending habits. You can also do so by boosting your income. Earning more is also a great way to save more money. Remember to avoid lifestyle inflation as you earn more, then only you would be able to save more. Your skills and earning ability are your greatest asset that can help you reach all milestones in your life successfully.
Seek expert help, create a financial plan and improve your savings rate to maximize your investment success.
Disclaimer
This blog is meant for educating people about the importance of the right financial planning. The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. Consult your financial advisor to get personalized recommendations based on your life circumstances.
About Rajiv Nair
Rajiv Nair co-founded Finshield Investment Advisors after successfully managing several large clients and businesses in the financial services industry for over 15 years. Rajiv is a Certified Financial Planner who believes – ‘Any amount of effort in wealth management is worthless if at least a part of it is not usable within your lifetime’. He is known to be steadfast in his Investment philosophy and an avid reader on diverse subjects. Learn more about him here Rajiv Nair | LinkedIn
