Instead of opting for standardized advice on saving, you must focus on a goal-based saving approach.
Remember the common advice that every person should save 10-15% of his income? This, which seems to be an unwritten rule of saving, could also turn out to be the worst personal finance advice. Let’s understand the case of Prabhu who is employed as a senior developer in the IT industry.
Prabhu’s salary is Rs 1 lakh per month. Since he is young, he followed this standard advice of saving 10% of his income. He thought that as his need to save was taken care of by following this advice, so he could happily splurge now. He, therefore, bought a car worth Rs 12 lakh by taking a car loan.
Since he was going to marry soon, he also purchased a house opting for a housing loan. He also took a personal loan of Rs 8 lakh for his marriage. However, after doing all this, Prabhu found himself tied to EMIs worth Rs 60,000 per month. With his take-home salary of Rs 89,000 (after deductions), Prabhu finds himself in a fix. He feels that improper financial planning led him make impulsive decisions which derailed his finances.
Like Prabhu, many people don’t realize that the decision to save needs to be complemented with goals. If your saving strategy does not help you achieve your goals, you need to revise your saving strategy. In the case of Prabhu, instead of opting for impulsive purchases, if he had opted for goal-based saving, his financial would have been different. He is paying Rs 21,000 as the car loan EMI. Had he invested the same amount in a mutual fund, at 15% annualized return, it would have fetched him Rs 9,47,426 in just 3 years.
A careful number-crunching of your goals would, thus, reveal that you must save more than 10-15%. For someone who wants to fund his child’s education and marriage, the required savings could be as high as 25% of his present income. A monthly saving of 10-15% will not help you fulfil life goals. A standardized savings rate such as 10-15% can distort your financial planning and also become a big hurdle in achieving your goals.
The role of saving is to inculcate discipline in your spending habits. The impulsive spender would often find himself living paycheck to paycheck, and find his goals far from his reach. This is not the situation you want to be in. Each individual is unique, and so are his wants. Before embarking on your saving journey, it is essential to understand your financial goals. What works for others may not work for you. If number crunching seems intimidating, you can seek the help of a good financial adviser who will help you to choose the right investment products that can complement your financial goal.
The crucial question is: what if you do not have enough money to save? In that case, you will have to revisit your goals. Either you have to reduce your expenses or increase your income. You will have to prioritize your goals. In extreme cases, you may even have to drop some goals for the time being until your financial situation improves.
Remember, you are unique and so are your goals. Instead of opting for standardized advice on saving, you must focus on a goal-based saving approach. This will lend clarity to your objective of saving money. If possible, avoid DIY when it comes to personal finance. A good adviser wouldn’t just help you achieve your financial goals, but more importantly, he can help you avoid bad decisions that can ruin your finances.
(By Abhinav Angirish, Founder, Investonline.in)