Cut expenses for permanent parking spot in safety zone

For instance, Archan, a management trainee working for a multi-national company would like to have an accumulated saving of R5 lakh in two years. He would like to save 50% of his annual earnings of R5 lakh. He plans to do this by parking the surplus of his earnings in a savings bank account of a public sector bank on a monthly basis (opened exclusively for the goal of accumulating R5 lakh in two years). But let us assume that on completion of the 24th month, his balance in the saving account is just R1.5 lakh (interest on savings is excluded). When he tries to figure out the reasons for missing the targets in wealth creation, he is clueless on how to avoid such failures. That’s where the concept of “margin of safety” holds light.

Margin of safety

Margin of safety (MoS) is the extent to which an individual or entity can withstand the drop in revenue. In other words what per cent of safety margin an individual has in terms of meeting his variable and fixed expenses? It is the excess or shortage over the break-even revenue. In this example, Archan estimates his annual expenses to be R2.5 lakh and aims to have a surplus of

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