Experts write billion words about investment. But it is surprising that how little is written about how to save money. Saving comes naturally among Indians. But the global issue with savings is inconsistency.
How to save money consistently year after year?
Saving money is an art, and this is the reason why every one cannot master this art. But what can be done is to learn the basics of money management. This will greatly help even the non-savers.
Saving and investment of money is required for long term wealth creation. Long term wealth creation for family is the ultimate goal of saving and investment.
But wealth creation will be a goal which is too broad. Having a goal like this doesn’t motivate a person to save more.
Hence, finalizing a goal which is more specific, and with which a person can also relate-to is desirable.
To fix such a goal, one has to understand an alter point of wealth creation. What destroys wealth building possibility?
The biggest devil is debt and overspending.
Let saving money be that tool using which you can fight these two devils.
So next time when you take a pledge to save 10% of your income, tell yourself why you are saving money.
If one is able to save money consistently then 50% job is done.
We all are born as great spenders. Our focus is more on spending instead of saving money.
This is the reason why even if we save well today, but ultimately we end up spending all those savings.
The temptation to spend is so high that, the savings eventually gets eroded.
We always seem to have some valid excuse for spending money.
Our mindset does not allow us to save more. We prefer to spend as we enjoy buying things.
I bought a Macbook for myself by spending my savings meant for loan prepayment.
It would have been much wiser for me to use that money for its rightful purpose.
My calculation says that, if I would have made the loan prepayment (instead of buying the Mac) I would have saved more than Rs 250,000.
This is more than twice the price of my Macbook.
So, in real life, saving money becomes tough due to temptations.
If it is so tough then how to save money?
In India, people have different methods of saving money as compared to people from Europe and America.
In this blog post we will see the unique ways in which successful people save their money.
Start with baby steps…
Saving money is only the first step.
Preserving it from getting spent uselessly is the next important step.
The trick is to first save and then lock it.
How to lock savings? Now, this will be too quick for person learning to take baby steps 🙂
First digest this idea that saving alone is not sufficient. It is also important to lock it.
In this article we will see how to save money each month and also keep it intact.
Right Reasons to Save Money
If we do not first give ourselves strong reason to save money, the money will ultimately get spent unnecessarily.
Simply saving money will not help. One must also have good reasons to keep saving locked.
This is why, extremely self-disciplined and mature people save more money.
One must give themselves strong reasons to save money. Once we have a strong reason, we can then start to save money each month.
Save Money for Financial Independence…
Are you tired of your job? Do you hate your boss? Do dream leading a life which is more in your control?
If the answers are in YES’s, it means you want financial freedom.
Saving for financial independence is such a goal which is self-motivating.
There are people who save to buy car, buy vacation, etc…this is also not bad.
But it is also true that a true goal must also have a spiritual side of it. This spirituality encourages people to keep saving even in tough times.
The reason to save money should be simple, understandable, measurable and must also have a spirituality attached to it.
So my take about a RELIABLE GOAL to save money is consistently is to do it to attain financial independence.
But what is Financial Independence….?
Generate income, save money, buy assets, and this generate passive income. This is the process of wealth creation.
In simple words, wealth creation is a process of generating more and passive income.
The more one builds wealth, the closer one becomes to financial independence.
But wealth creation takes time. It is a slow but sure process of becoming self reliant and rich.
Wealth creation is like nurturing an Apple tree. It takes time to grow but when it grows it reaps fruits.
Why wealth creation is a slow process?
Suppose RAJESH has $2,000 in savings. If RAJESH invests it in bank deposit it will yield an annual passive income of $120 (say @ 6.0% p.a).
But $120 per annum is too less. It is nothing….
This is why people rely on their paycheck from job to manage day-to-day needs.
Potential income that can be generated from savings is too less. Why? Because we keep so less in our savings.
Suppose RAJESH needs $45,000/year to manage his day to day expenses.
In other words, RAJESH must increase his passive income from $120/year to $45,000/year to become.
But how to do it?
This will be possible if RAJESH can increase his savings in bank deposit from $2,000 to something bigger.
At the rate of 6% per annum interest, the required deposit should be $750,000.
A bank deposit of $750,000 will then generate a passive income of $45,000/year.
For sure, accumulating $750,000 is going to be neither easy nor fast. Wealth creation takes time.
If objective is to get rich and attain financial independence, one must be patient.
Become a big saver of money…
Why it is so difficult to change our status from an owner of $2,000 to an owner of $750,000?
Accumulating $2,000 is lot easier. It is easy not because the value is small, but because we cannot do much with an amount less than $2,000.
But by the time we accumulate $2,000 or more as savings, we start getting new ideas of spending it.
We start getting ideas of why the new iphone-10 is the best phone ever. How that new LED TV will change our lives….
The point I am trying to make is this, starting to save is easy, but hurdle comes later. The main challenge is to keep those savings intact.
This is the reason why experts give so much emphasis on investment.
By investing money we can locks our savings.
Investment keeps our money away from us. This way, it does not get spent on trivial things.
Investment also yields returns (like interest of 6% p.a. from Bank Deposits).
These returns on investments can earn us potential monthly income that we need to attain financial independence.
So now we know that, a combination of saving and investment is essential.
Knowing easy ways of how to save money from salary will help in the wealth creation process.
Ideas on how to save money in India each month
1. Pay Yourself First
First step is to open two bank accounts. One will be a salary account where the paycheck gets deposited. The other will be savings a/c.
In savings account, money only comes in, and if it goes out, it goes only for investment.
Second Step is to budget all expenses. Try remembering all expense that you made in last one year.
It should cover all expenses starting from utility bills, cooking gas, groceries, vegetables, vehicle fuel, house rent, EMI etc.
Expense that we often fail to budget are vehicle insurance premiums, emergency funds, unplanned purchases, property tax, miscellaneous expenses, vehicle maintenance, gym, dining out, prepaid mobile recharge, etc.
The point I am trying to emphasize is, our list of expenses shall be very exhaustive.
Once we have identified all expenses, start putting values against each.
Third Step will be to identify how much we can pay to ourselves.
Suppose monthly income is $100. Total expenses comes out as $85. It means $15 is the money we can save from salary.
This $15 should be that money that no matter what we do, will never be needed to manage our day-to-day needs.
Pay yourself first this amount ($15). How?
Fourth Step will be how to pay oneself.
Remember, you have two bank accounts, ‘salary’ and ‘savings’. Online transfer this $15 from your salary account to your savings account.
This transfer of money should be done on the first day your paycheck gets credited into your salary account.
Before you pay any bills, pay yourself first. Do not allow yourself to even get a feel of those $15.
Make it as if this money ever existed in your salary account.
Making yourself feel poorer is better. If we have less in your hand, we will spend less.
But remember that feeling poorer is not the real goal. Feel poorer for long term wealth creation is the objective.
If we have excess money visible, our mind start playing pranks with us. It will generate ideas of spending on needless things.
This is the reason why the world richest man Warren Buffett leads a humble life. His focus is wealth creation and not on lavish spending.
2. Open a Piggy Bank at Home
Now we know that when our mind sees free cash (unlocked money) it start playing game with us.
Free cash in your wallet? Your mind will gives innovative ideas of spending it on trivial things.
The ideas can be like going on cruise for vacation, buying a nice car etc.
It is only natural. Spending on entertainment and luxury cannot be avoided. It is only human nature to ask for it.
But there must be control. Family must understand the going on unplanned vacation and buying car impulsively is too expensive.
So it is better to plan for it. How to plan?
Planning means, giving oneself a distant date (for vacation or car) and start saving for it from today.
The whole family should get an idea that they can save anything from small coins to big notes to fund the cause.
The objective should be to save heavily so that the piggy bank gets full in quick time.
This type of exercise does two things for us. First, the family realizes that if they want to buy a big thing it takes time to realize a dream.
Secondly, the family will learn that it takes effort and patience to buy things. Kids will learn how to fight the temptation of immediate gratification.
Make it a habit of your family. In case one wants to buy any big thing, first discuss. Then start a piggy bank and start saving for the cause.
Everywhere Daddy’s credit card will not fund the requirements.
This will cultivates the habit of savings which the family can cherish all the life.
Piggy bank is only symbolic, what it actually does is to cultivate one of the best habits necessary in all human beings – wise spending and more saving.
3. Your Pay rise should also reflect on “Pay You Self First” rule
At the end of the year when we get a pay rise it is always very satisfying. But what we do with this pay rise?
Generally we end up spending all of our our pay rise by inflating only our expenses column.
For sure, when we get a pay rise we can expect a proportional rise in standard of living.
But a proportional rise should also reflect in ‘pay yourself column.
Till last month your salary was $100 and your were paying your self $15. If your salary grew to $120 then you pay-yourself should also rise proportionately to $18.
The advantage of increasing the Pay Yourself Column is that, it adds to your savings.
The more you are contributing to your Pay yourself column, the more free cash is available for investing.
It creates a cyclic process. High Income > High Savings > More Investment.
4. Take bank loan, but self contribution should be more than 50%
This piggy bank is slightly different from your home piggy bank. Leave that piggy bank for your children.
This new piggy bank should be used for bigger expenses like new home purchase, new car, higher education for child etc.
Suppose you decide that you want to buy a car, it is very easy to buy it using car loan. If you decide to buy car today, tomorrow you will get a car loan and within days the car will be at your door steps.
But what is suggest is to learn to delay this gratification.
As a rule of thumb instead of paying just 20% as down payment for the car, try paying 50% as down payment.
Suppose your want to buy a car whose price is $13,350. Ideally a bank will pay you loan for 80% of the cars value $10,700. But do not fall prey to this temptation.
Instead, wait till you have 50% funds ready for down payment.
Create a piggy bank for buying this car. This piggy bank can be like a mutual fund SIP or a money market fund.
Rule is, you are not allowed to but the car till you have 50% funds ready for down payment in your piggy bank.
You can also do similar exercise while buying a house. Set aside each month a sum of money that on a later date you can use for buying your house or your car.
5. Pay a Hypothetical EMI for your New Home
Even though you are not planning to buy a home today, imagine that what if you have a home for which you are required to pay EMI.
But how much EMI you shall pay for this imaginary home? A person can pay EMI equivalent to 30% of their take home salary.
Suppose your net income per month is Rs 10,000, in this case you can pay Rs 3,000 as your imaginary EMI.
Continue paying 30% as EMI to yourself.
This EMI you will continue to pay till to really buy a home. By the time you really start paying the EMI, your are already used to paying that amount.
But more than that, paying this hypothetical EMI is building a corpus for the down payment for home.
Supposing that you are a 24 years old graduate, just out of college. Your are in your first job.
If you start this virtual home buying EMI payment scheme now, by the time you are 30 you will have a nice savings.
You will also exactly know how much EMI you can actually afford. Paying hypothetical given this tremendous realization about our affordability.
I have personally used this trick of money saving and it works the best.
6. Accumulate Precious Metals Like Gold or Silver
I will suggest to add one column in your expense budget. Name it ‘investing expense on gold/silver’. Keep a target of buying at least 5 gm of gold (or equivalent of silver) every year.
Presently 1gm gold will cost approximately $41. This is nothing compared to what we end up spending on weekends.
Every month save $20, it will be sufficient to buy a 5 gm gold coin at the end of the year.
The idea of highlighting gold purchase here is because of its ability to lock funds.
Once we buy gold it is not easy to spent it (like cash). Moreover gold also shows reasonable price appreciation in long term.
Suppose you buy 5gm of gold each year for next 20 years. At the end of 20th year you will have 100gm of gold.
If gold price appreciates even at a decent rate of 6% per annum, after 20th year its rate will be close to $132/gm. It means, 100 gm of gold will be worth close to $13,000 (Rs 8,50,000).
I personally consider gold/silver as an excellent way to save money from salary. It is a great tool of locking money from getting spent on trivial things.
7. Prepay Your Loans
These days almost all of us carry some form of loan or the other. Majority of us carry personal loan or home loan.
Prepayment of loans helps in saving heavily on interest.
I have written one article purely on home loan prepayment. If any one wants to know more about loan prepayment they can read this article.
This is one practice that I have personally followed and had experienced its benefits. Prepayment has not only allowed me to save on interest but it also allowed me to close my loan in half the tenure.
There was a stage in my life when I was diverting all of my ‘pay yourself funds’ towards my loan prepayment.
Home loan prepayment is a very realistic way of saving money. Every time I make a prepayment I know that I have saved huge interests.
I will suggest my readers to at least once read this article on loan prepayment and decide for yourself whether this is worth trying or not.
8. Open Savings A/c in Bank offering highest interest rate
Why to only think complicated when it comes to savings money. You will agree that the easiest way to save money from salary is by opening a savings account.
We do not consider savings account as best option because it offers low interest on savings account.
But let me ask you this question, do we have an option? If we are not opening a savings account can we manage with something else? No we do not. One has no alternative to savings accounts.
What saving account to do for us? It helps us to receive salary, pay bills, get debit card/credit cards, avail home loan etc.
So why to needlessly ponder about low yields from savings account. Better option is to choose the best from the worst.
Yes, these days not all banks offer same interest on savings accounts. A good idea will be to have our savings account in a bank that is offering highest interest rates.
Interest Rates on Savings Account
|Deposit Type||Name of Bank||Offered Interest Rate on deposit below Rs.1L
9. Planning Taxes saves money
Our target is to save every bit possible from our salary. By planning our taxes we save a good deal of money from salary. Let me give you an example to explain how much we can save by planning our taxes.
Small savings like these can make hell of a difference in long term. In India, rules allow us to save money from salary as listed below:
U/s 80C – Over all exemption is Rs 100,000/year
(Investment in ELSS, PPF, NSC, LIC, Home Loan Principal etc)
U/s 80D – Over all exemption is Rs 15,000 (Rs 20,000 for Senior Citizen)
(Health insurance for Self, family, dependent parents)
U/s 80E – 100% interest on education Loan is exempted from Income Tax
(Education loan taken for higher studies of self, spouse, children)
|Examples||Income per Year||Tax Saving||Tax Payable||Savings/ year compared to Ex. 1|
10. Develop Small-Saving-Habits
When it comes to long term savings, even small savings make a big difference. Small saving over a period of time can prove to be very beneficial. Big benefits are not visible while practicing small saving habits. Small saving habits is more like a discipline.
When we practice small small, we also inculcate these good habits in children. Small saving habits works on the principle of ‘delaying gratification”. Lets see some small savings habits that we can implement in our day to day life:
- Driving a diesel car will save you Rs20/liter compared to Petrol. Driving a CNG car will save Rs 35/liter compared to petrol.
- Buying groceries in bulk from places like D-Mart can reduce your monthly bill by about 3-5%.
- Instead of buying new books to read, try a smart phone app that provides free audio-books. This can save at least Rs500 per month.
- When you leave your house switch-off electrical appliances. Never leave chargers/TV/Phone/Music/Laptops/Microwaves on standby mode. This itself will reduce your electricity bill by nearly 3%
- Buy clothes in bulk on those February month SALE. Idea shall be to buy all news clothes for that year in February (as far as possible). Use these new clothes as and when the occasion comes. This can save you nearly 30-50% of cost you spend annually on clothing’s.
- Try jogging early morning in open air. This can reduce your gym bill by Rs20,000 anually.
- Before you swap your credit card, ask yourself if you had to pay by cash, would you have paid for this purchase? Generally because we are using credit cards, we buy things we cant afford. This small habit of self checking ca reduce your unnecessary purchases by 5-10%.
- Plan your annual vacations in advance. Book air tickets 3-4 months in advance. Do hotel bookings 3-4 months in advance.
11. Prepare a Personal Cash Flow Report
Here the idea is to buy things we can afford. Generally we get tempted to buy things we cannot afford. This creates overspending.
Why we overspend? We overspend in ignorance.
If we are not aware of our affordability, we will fall prey to overspending.
How to prevent oneself from overspending? We will see a solution to these problems emanating from real life experiences.
Check and correcting bad habit of overspending has resulted in development of this wonderful solution.
Generally when it comes saving money, nothing seems to work.
But the concept of cash flow report preparation really works.
Example: One day my family decided to replace our old dilapidated refrigerator with a new one. The cost of that refrigerator was Rs 49,000.
Before we commit to buy that refrigerator, I ask to my self “Can we afford it“?
To answer such questions I dig deep into my cash flow report.
In ‘miscellaneous shopping’ row I checked how much saving we have accumulated.
I found that we can easily buy one. In the same time, I was suppose to pay school fee of my child. The fees was close to Rs 35,000.
When I checked my cash flow report I found that I was running out of funds. As this was uncompromisable expense.
Hence I decided to borrow some money from ‘miscellaneous shopping’ fund.
As a consequence we were not able to buy refrigerator that month.
But we knew that in next couple of months we can buy it.
12. Always Save Money for Birthday’s & Anniversaries
It is my personal experience that not saving for birthday’s and anniversaries can lead to more burden & pain. Birthday’s and Anniversaries are such events that happen on a fixed date each year.
Depending on ones requirement, it is advisable to save 12 months prior to the real expense date. We are 3 people in my family. It is inevitable to buy gifts & arrange a small party during 3 birthdays and 1 marriage anniversary. If the expense is inevitable why not save for it from start of the year? If we are not saving it means we are spending it somewhere else. It means, when the priority comes (like Birthday’s) we dig into our emergency funds or investment to meet the needs. This causes a very serious dent to our goal of financial independence. The best way to save for Birthday’s & Anniversary is to start a recurring deposit (RD). This will also earn decent returns and will also lock your savings for each 1 year. I have started following recurring deposits for my family.
13. Skip Grocery Purchase once in every two months
This may sound too foolish suggestion to save money but it really works. Almost all household maintains a huge inventory. Funny thing is that we are not even aware that we maintain it. Sometimes it happens that this inventory gets stale and then we realize it.
In my house I have noted items like kabuli chana (white gram), rajama (kidney beans), maida (wheat flour), tooth paste etc frequently appearing in forgotten-list. This list is endless. We can only come to know about it when we start searching for it. Best way to start searching is by not doing grocery shopping one weekend. Then, looking into your inventory for any thing that can be cooked and eaten. This will not only clear your food-store, but will also save good money. It is really an interesting habit. I will suggest everybody to try it once in 2 months.
14. Increase Home Loan EMI by 5% each year
This is a very safe bet. It diverts your money from expense to loan pre-payment. Banks would like you to pay home loan till the last month. But it is in our interest to prepay the home loan early.
Not only it will make us debt free, but it will also save huge money. Many people does prepayment of home loan. They accumulate money (savings) & then make prepayment. I will propose an easier alternative. As soon as you get your annual pay-hike, make visit to your home loan bank. Tell them that you would like to increase your home loan EMI. I will suggest you to increase your home loan EMI by 5-12% each year. I have observed one of my friend using this trick very effectively. They managed to pay back their home loan in less than half the total tenure. So go on and increase your home loan EMI. Make it a good habit. Increase the EMI judiciously each year.
15. Save Money to Generate Future Monthly Income
I have found this trick to save money very useful. All monthly income plans (MIP) are debt linked investment so its absolutely save. No need to worry about possibility of loss. Starting a MIP will solve two purpose.
First, it initiates a strong desire to save money. If idea is to generate future-fixed-income, its very inviting. Higher will be the fixed income (like from MIP) less dependent we will be on our salary. It ultimately translates income financial independence. The only drawback with MIP’s are low returns. But believe me, do not discourage yourself to start a MIP because of lower returns. Look at MIP as Savings option that is given long term returns close to 5-6% per annum. A savings plan giving these returns is very good. Some might ask that if we are locking our money for long term (in MIP max is 11 years), why not invest in equity? Some might even say that if return is close to 5-6% why not buy a Fixed Deposit? Both questions are valid. But in MIP we are able to generate fixed income after some years. Equity can never promise fixed income. Fixed deposits can give higher returns its too liquid. People are often found redeeming their FD’s prematurely. Considering that purpose is to generate fixed income, MIP’s are very good ‘savings’ option.
16.Lock Your Savings Forever
One day I asked one of my friend, how much is your saving? He replied 30% of his take home salary. I said that’s very good, but how much do you save out of it? He became puzzled, so rephrased my sentence. I asked, out of 30% how much you never spend? What happens is, though we save money today, but we eventually end-up spending them.
This does not help our cause. Real saving is that saving that never get spent. Generally, what we keep in savings is very liquid form. Liquid money gets spend very easily. Savings account, recurring deposit, fixed deposits are good saving options but it does not lock our money. When we do not lock money it gets spent. So the efficient saving is that money that can never get spent & keep appreciating in value. Suppose one has home loan, use the savings to make prepayment of loan. Once prepayment is made, that money can never be spent elsewhere. Moreover, prepayment also saves huge sums of interest component. Similarly if one is carrying any type of loan (auto, personal, education, credit card etc), saving must first be used to prepay loans. This is one very effective way of locking savings from getting uselessly spent elsewhere. One can also use savings to buy as much as tax-savings options. It is a rule that says, be 100% tax efficient and 100% debt free before investing money. We spend so much time thinking about stocks and mutual funds. But instead, we make more money by simply saving tax & clearing-out outstanding loan by prepayments.
17.Budget higher than necessary
People who spend money according to budget can use this tool to save more money. The trick is simple which will helps to save money unknowingly. It is common belief that if one has to save, it must be done unknowingly.
Too much awareness about saved money will ultimately lead to spending. If saved money is ultimately getting spent then that saving is useless. Try this trick and you will be surprised how easy it becomes to save money month after month. The trick is, we adapt to higher expense within couple of months. So after a couple of months one does not realize that they are budgeting more than necessary. Hence this savings gets accumulated month after month. It is important to proper channelize the savings. One can either put them in fixed deposit, invest the money, lock it in emergency account etc.
|SL||Fixed /Predictable Monthly Bills||Actual Bill Amount||Budgeted Savings (10% Extra)||Savings|
|(i)||(iii)||(ii) – (i)|
|3||Monthly Loan EMI||$500||$550||$50|
|4||Internet Broadband Bill||$25||$27.5||$2.5|
|8||Annual Auto Maintenance||$20||$22||$2|
18.Trick Yourself & Save Money
We are all natural spenders of money. We can spend money more easily than we earn them. Hence it requires special tricks to continue saving money for long time. We can actually trick our mind and influence it to save more money.
a) Buy a Day of Financial Independence: Suppose ones annual expense is $24,000. Divide this by 365 and the value you get is $66. This value can be used to motivate our mind to save. The value is more achievable and encouraging. Every $66 saved means the person is actually buying a day of financial independence for his/her family.
b) Reduce frequency of spending: When we say that we must give something all together to save money, that statement itself makes it difficult to practice. Instead of giving up something all together its more practical to reduce its frequency. A habitual dinner cannot give up drinking in a day. But if frequency of drinking can be reduced to once month, that itself can be considered as a success.
c) Idling triggers spending’s: Have you ever noticed yourself planning to buy a Smart TV while you are knee deep in work in office? No, when we are busy doing something our mind cannot go on a spending spree. Its the idle mind that’s the culprit. Keep yourself busy. Developing a hobby is a good way to keep oneself engaged all the time.
d) Make all your big Purchases in Cash: Credit cards has made spending’s too easy for us. We buy now and pay later. This facility has made us a compulsive spenders. We do not feel the money leaving our pocket. On the contrary, studies say that people who pay by cash are more likely to live more frugal life.
e) Spend only on things you use most: We spend most of time home in our living room. In metropolitan cities, people spend more time driving on road. In smaller cities people spend more time watching TV. Its a good idea to identify which activities take most of your time. Spend money to make only these areas better. This realization will help you understand that where you can avoid your spending’s.
Saving money each month is difficult. But setting up rules as discussed above will not only manage your short term and long term expenses but will also make you financially independent.Have a happy spending.Do not forget your goals of Savings…We are saving to ‘Get Rich, and the only way we can get rich is ‘BY ACCUMULATING ASSETS’.