How Can I Walk Ahead Towards Sensible Finance?

The legendary investor Warren Buffett once said, “Don’t save what is left after investing, but spend what is left after saving.” This blog will explain the rationale behind this famous quote and how you can embark on your saving journey.

If you are a working millennial who is enjoying his life by partying on every weekend, buying swankiest cars, taking frequent vacations abroad, then you will have a tough time post your retirement. There is no problem in living hand to mouth, but the problem occurs when there is an emergency which demands sudden cash outflow.

The emergency can be a medical emergency; you lose your job, or car repair etc. The person having some savings will sail through this crisis but the millennial spending as if there is no tomorrow will have to suffer. Thus, it is always advised by money managers and financial advisors to save a certain percentage of your salary to fund such emergencies. Otherwise, you will have to take loans for unemployed with bad credit and no guarantor that may available at competitive interest rates.

You should thus prefer having an emergency fund to tackle the unforeseen circumstances. This saving also helps an individual to meet his future goals which can be buying a house, buying his dream car, higher studies of his children from a reputed institute etc.

The money you saved and invested in an asset class will also act as your retirement fund once you attain the age of 60 and stop working. In a nutshell, having some money in your kitty in the form of cash or liquid securities will help you in every stage of your life. Start saving small and invest that in asset classes with a long term horizon to enjoy the compounding effect.

Now that you know the importance of saving let’s get to know some of the innovative ways which you can adopt to save money. It would not be easy to cultivate the savings habit initially, but with discipline and consistency, you will master the art of saving. Here’s how:

  • Expense Monitoring: The first thing you should do is prepare an excel sheet of all your expenditures that are incurred monthly. Segregate all expenses into categories like fuel, mortgage, rent, travel and leisure, groceries etc. This will help you to track where you are spending and how much you are spending every month. At the end of this stage, you will have better clarity about how much is your average spending every month.
  • Prepare A Budget: Now that you know about your spending pattern, it is the right time to make a budget and start following it. Tweak your expenses according to your income so that you have the portion left to be set aside as savings. Ideally, aim for a 10-15% of your income to be set aside as savings. Prefer limiting your over expenditure and luxury expenses, cut back on those expenses which are futile. For instance: Cancel all the paid subscriptions you don’t use, prefer walking for shorter distances, don’t go for the costliest internet plan etc.
  • Needs vs. Wants, Take a Call: It is high time for you to decide whether a particular investment is a need or a want. Go for it, if it is a former one else avoid if it is more of a want than a need. The distinction between these categories is that needs are necessities which are essential goods and services like food and shelter while the wants are lifestyle expenses for a comfortable life.
  • Invest Your Savings: Many people find it difficult to save money in the form of cash and often end up spending that also. A simple and effective habit to inculcate to counter this issue is to invest the money you set aside for saving. Start an RD in a bank, or a SIP in any Mutual Fund, or take a life insurance policy which will create a binding liability for you to pay every month. There are dual benefits of this strategy, first is you will not end up spending your savings and second is you will make money in the form of returns from your investments. These investments will also give you tax benefits and will act as your retirement fund.
  • Become Debt Free ASAP!!: Your ability to save is often obstructed by your liabilities and obligations. For instance, if you have a credit card outstanding or a personal loan against your name on which you pay interest every month. If you have taken loans, then the interest portion is significantly higher. The interest outgo every month is a significant strain on your finances and hinders your ability to invest in interest-bearing assets. Thus, you should go for one-time settlement of your loan to finish it off for once and all. This will create some room in your monthly budget to save more money.  
  • Beware of Credit Cards: Millennial love using a credit card for their shopping spree or swiping it at gas stations thinking that they will have to repay in the next billing cycle. Sure, you will pay later, but even if you default by a single day, the interest charged by banks is exorbitantly high. Warren Buffett once said, “If there’s one advice I will give to youngsters today, then it would be to stay away from credit cards.” The point is you can’t go through life by borrowing money at such high rates and be better off. Buy those things only which you can afford, don’t incur additional liabilities and keep paying interest for taking loans to buy depreciating assets.

The bottom line is saving money is not a gigantic task, it may seem difficult initially, but you have to be disciplined with your budget. Invest your savings in income-generating assets to meet your long term loans goals rather than buying expensive watches to impress your near ones.

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