How much should you save? Find out | The Financial Express

How much should you save? Find out

In this New Book, BankBazaar CEO Adhil Shetty talks of Cycling To Work, A Generous Boss, and Lessons In Savings.

How much should you save? Find out
Savings, when managed smartly, leads to liquidity, which can be used in times of need, insurance against economic risks, better return on investment and timely repayment of debts.

My First Savings Account: My career started with Cisco Systems in 2001. I worked in Bangalore. I used to cycle to work. My home was on Rest House Road and my workplace on Richmond Road. I would ride my bicycle through Cubbon Park to get to work. The office was in the then quiet Bangalore, near the hockey stadium.

One day my boss saw me riding to work. She asked me if I had trouble paying for transport. She even generously offered to give me a raise if my income was not enough. I assured her that my biking was for non-financial reasons, that I enjoyed cycling and it was good for health. Besides, anyone who has taken a walk through Cubbon Park will tell you that being in its oxygenated and leafy confines is one of the great joys of living in Bengaluru.

This was the first time I had stepped away from my parents’ home in Chennai. It was after landing my first job that I opened my first savings account: a salary account with HSBC Bank. The first money that came into that account was my salary from Cisco. This marked the beginning of my many firsts: my first income, my first rent payment and buying the first gift using my own money for my parents.

Looking back, did I set the best example in terms of saving? Probably not. I enjoyed a good life in that period between 2001 and 2003. I managed to save only a little and ended up spending nearly everything I had earned. In retrospect, at the very least, I should have started a savings plan.

Now, I always recommend that people save at least 20 per cent of their disposable income. I am today convinced that that adage is true: being rich is not how much money you have, but spending less than you earn.

Also Read: 5 signs to know you are ready to buy your own house

The Importance of Savings

Bank savings constitute a large chunk of household savings in this country. The RBI said in June 2020 that currency and bank deposits formed nearly 70 per cent of India’s household financial assets. The central bank describes these assets as ‘bank deposits, debt securities, MFs, insurance, pension funds and small savings’.

Of this, commercial bank deposits constitute a whopping 52.6 per cent. Currency holdings are at 13.4 per cent. Deposits with cooperative banks form another 3.8 per cent. These bring the value tied to bank deposits and cash holdings to 69.8 per cent of household assets. Indians are over-dependent on their humble savings account. It, therefore, becomes much more important to use it smartly. It is not enough for a bee to create honey. It should also be able to enjoy it.

Savings, when managed smartly, leads to liquidity, which can be used in times of need, insurance against economic risks, better return on investment and timely repayment of debts. Above all, smart savings leads to the achievement of our objective: reaching the apex of our 5S Pyramid, which is Serenity.

How Much Should You Save?

Alpana, an Early Jobber, lost her job as an accountant in Chennai when her company downsized in the aftermath of the 2019 economic slowdown. Many of her peers also lost their jobs. The situation, however, did not perturb Alpana. She has always followed a simple rule of thumb: she saves up to at least six times her monthly income as a fixed deposit (FD) with the bank she has her salary account in.

Alpana called this money her emergency fund. She had started saving up as soon as she had started working. She concluded that to be financially independent, it is not enough to have a job and an income stream. She knew she also needed money in her account to be truly secure.

When she lost her job, she did not have to return to her hometown, like some of her co-workers. She continued staying in Chennai. Thanks to her savings, she could continue paying rent and meet her other necessary expenses, such as food, healthcare, utilities and transportation. After a three-month wait, she landed a new job. The savings, thus, ensured that Alpana could avoid the setback of being pushed back to her hometown from where a professional comeback could have been difficult.

It brings us to the two most important questions about savings. One: have you created an emergency fund? Two: how much savings do you consider enough?

The first is a simple yes-or-no question. An emergency fund is your rainy-day purse. If you have not created your emergency fund, waste no time. Get started on it right away.

Emergencies can arrive in any form and hurt your everyday finances. For example, in India, expensive hospitalizations push 7 per cent of the population below the poverty line every year. You might lose your job or business. There might be a need for an urgent travel. A plumbing repair might cost you dearly. It is best to anticipate and prepare for such contingencies.

The second question is more difficult to answer. There is no one-size-fits-all answer. You must find one that suits your unique situation. In this book, we are going to examine answers to many questions like these. The answers require calculations. Sometimes, the answer is arrived at by extensive number crunching. At other times, we find the answer through a rule of thumb, which is an oversimplified solution to the problem.

For instance, we say that the rule of thumb for an ideal emergency fund is that it should be three to six times your monthly income. This can help you tide over a wide variety of emergencies. But if the risks are higher, the emergency fund needs to be bigger. For example, you might be having a health condition that requires frequent medical intervention that is not covered by your health insurance.

Note that your progress to savings, which are three to six times your monthly income, will take time. You can start by setting aside at least 20 per cent of your monthly take-home pay as compulsory savings at the beginning of every month. If you have higher disposable income, aim to save a higher percentage.

The emergency fund is the most basic form of saving. It is also necessary not to confuse it with other forms of savings, such as those for retirement, achieving life goals like buying a house, or for children’s education and marriage. Each objective for saving is unique. Each objective requires its own approach for fulfilment. Mixing up your objectives may make it difficult for you to achieve any of them.

(The following is an excerpt from the new book on personal finance, The Bee, The Beetle and the Money Bug, co-authored by Adhil Shetty and AR Hemant, and published by Rupa.)

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First published on: 05-02-2023 at 09:49 IST