When it comes to wealth creation, saving more than you spend is the first step.
Sure, technology at your fingertips gives you convenience and instant gratification. With online shopping mobile applications, powered by internet banking and unlimited data packs, you can purchase anything you like on the fly. But along with that, you also need to focus on saving adequately so that you can accomplish your financial goals.
Whether you’ve recently started earning an income, or have been for decades; some principles in personal finance don’t change.
Saving for your financial goals is fundamental.
Having a healthy bank balance is not enough, given that inflation does erode the purchasing power of your hard-earned money. Countering inflation by earning a positive real rate of return (also known as inflation-adjusted return) is essential.
In personal finance, an advocated adage is “Pay Yourself First.”
This means to save for your financial goals first, before spending it on unnecessary products or services. Just like experts recommend exercise first thing in the morning, more for psychological reasons than physiological; paying yourself immediately when your salary arrives follows the same principle.
With busy schedules, it is easy to miss investing towards financial goals. It is easier to find things to spend on, rather than mapping your savings to financial goals.
However, you need to find a way to turn things around.
To your benefit, once again, technology comes to the rescue.
Now—thanks to the convenience of mobile banking—it is just as easy to set up a savings plan as buying that favourite pair of shoes.
With the dawn of the new financial year, we encourage you to realign your spending routine.
Why do you need to save regularly?
Your salary or business income could be set, but you can most definitely change how much goes out and where.
If you save regularly, you will quickly find that your wealth adds up and keeps growing. That is simply letting the power of compounding do the work for you.
As your savings increase, it will grow faster, as each time the interest earned on your money is paid into your account it starts earning interest too.
This interest-on-interest is called compound interest. Over the long-term, it makes a big difference to how much your savings are worth.
The good news is: It is simple to get started, and then you can let things run on autopilot.
How do you set up a regular savings plan?
The easiest way to get your savings working is to set things up so that a little bit is added to your savings each month. By setting up an automated savings plan, you will not have to remember to make the payment nor will you be tempted to skip a month.
The quickest way is to give a standing order of a fund transfer from your Savings Bank Account into a product of your choice.
The best time to put a bit of money aside is just a few days after the date of your salary credit. This makes saving even easier.
How can you save and invest regularly?
Broadly, you can save regularly in three ways:
1) Bank Recurring Deposit
2) Public Provident Fund (PPF)
3) SIPs in mutual funds
Bank Recurring Deposit
You can start a Recurring Deposit with a minimum tenure of six months. Each month on the stipulated date, the monthly instalment will be deducted from your bank account. The minimum monthly instalment is Rs 500. You can keep a maximum tenure of up to 10 years. The interest you earn will be similar to that of a bank fixed deposit of a similar tenure.
Public Provident Fund (PPF)
The Public Provident Fund (PPF) is one of the most popular investment avenues in India. It is a scheme of the Central Government, framed under the PPF Act of 1968.
Briefly, the PPF is a Government-backed, long-term small savings scheme which was initiated to provide retirement security to self-employed individuals and workers in the unorganized sector.
So, if you are keen on a safe corpus, earning a decent tax-free rate of return, enjoying tax benefit; then PPF is for you. The contributions (i.e. investments) made to the PPF account, earn a tax-free interest and the maturity proceeds too are exempt from income-tax. Hence, it is said that PPF enjoys an E-E-E (Exempt-Exempt- Exempt) status from an Income-tax angle.
Under PPF, a minimum subscription of Rs.500 and maximum of Rs.1, 50,000 can be made in lumpsum or in 12 instalments per financial year. The investment will have a 15-year lock-in, however, partial withdrawals and loan of PPF balance can be facilitated.
When investing monthly, ensure the deposit is made before the 5th of every month, as the interest rate is calculated on the minimum balance from the 5th day to last day of the month.
SIPs in mutual funds
A SIP refers to Systematic Investment Plan, which is mode of investing in mutual funds in a systematic and regular manner. The method of investing is similar to your investing in a recurring deposit (RD) with a bank.
But the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit, and hence your investments (in mutual funds) are subject to market risk.
By adopting the SIP mode of investing for mutual funds, you'll draw two major benefits: rupee cost averaging and compounding.
And one of the biggest benefits of investing via a SIP is freedom from timing the market. SIPs can help you manage (even-out) the market volatility well. The volatility is mitigated through rupee-cost averaging.
Under rupee-cost averaging, you typically buy more of a mutual fund unit when prices are low, and similarly, buy fewer mutual units when prices are high. This infuses good discipline because it urges you to commit cash at market lows, enabling you to lower the average cost of your investments. The regular monthly investments will automatically average out the costs, while the time in the market will allow your investments grow through compounding.
Over time, you will be able to build significant amount of wealth.
It is simple, easy to get back on track with saving regularly in a few steps with mobile banking. All you need is to formulate a plan with specific financial goal in mind. Set the right asset allocation, and then you can save and invest regularly. Happy Banking!
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.