Financial independence, along with consistent savings and limited spending, is the road to wealth creation
By T V Raman
Gone are the days when people used to save money for retirement and emergency expenses only. Today, the focus is on a combination of financial planning and investment planning. Instead of just saving for the rainy days, individuals have begun believing in the concepts of financial independence as well as wealth creation. Interestingly, both the concepts are interlinked; the financial independence of the present day earns us wealth for the future.
Financial independence is more than what we assume it for. It is not just being able to fund expenses whenever one wants to; it also means being able to save and invest howsoever one wants to. Financial independence, along with consistent savings and limited spending, is the road to wealth creation. As Brian Koslow rightfully said, “the very first step to building wealth is to spend less than you make”. Hence, the importance of saving more than spending is the most accurate way to create a pool of funds for the future. But at the same time, does the ability to save less nullify the chance to create wealth? No.
Saving money in small amounts
Savings must happen with peace of mind. Accumulating savings should not bring financial worries as ignoring mandatory expenses to ensure meeting your savings target would only cause stress and uneasiness. Therefore, starting small matters. Saving money, even in small amounts, consistently for a long period of time helps people to feel confident and overcome a financial shock. Small savings not only create a habit to recognize the need for regular savings; it also helps people to come out of their comfort zone, plan necessary expenses and avoid unnecessary ones.
While saving money is in the form of parking cash and liquid assets in safe securities, investing money is more of a long-term process that may involve buying stocks, real estate, and other forms of fixed assets. Investments may require better long-term planning and understanding of the various investment avenues, but savings can begin at home with recording expenses, estimating monthly budget, minimising spending, setting up saving goals, deciding on financial priorities, and keeping track of the growth of savings.
Savings can easily be initiated by:
- Estimating the sources of income
- Keeping funds aside for the necessary and regular expenditures such as household rent, utilities, medical expenses
- Keeping funds aside for the other expenses that can be irregular in nature such as vacations, movie outings, and so on
- Accumulating rest of the funds under the head of savings.
Keep budgeting in mind
The most important factor that has a significant impact on the quantity of savings is budgeting. Sticking to a budget helps to ensure a consistent approach to savings and investment. It also includes exercising willpower to not spend accumulated funds for some unnecessary or unwarranted expenditure. The mantra to successful savings can be summarised as ‘ABCD’, where:
‘A’ stands for Arranging income, expenses, and savings under sub-heads,
‘B’ stands for Budgeting and balancing expenses with income,
‘C’ stands for Consistent approach to savings, and
‘D’ stands for Developing the short-term savings into long-term investments.
Young individuals should focus on making it a habit to save a certain amount of money at the end of their periodic earnings. Youth today are often puzzzled about how to manage their finances, for this they should try allocating expenses under different heads and a part of their earnings should be retained as savings. It is a very good habit to keep track of our expenses and analyze it every fortnight. This gives us an opportunity to keep a check on unnecessary expenditure and control it for the other half of the month. Little efforts take us far, every paisa has a value and contribution in making a rupee.
The young generation must follow these simple tips to save money:
- Learn self control and prioritise habitual saving
- Learn to apportion and allocate entire earning under various heads
- Start with small investments, and analyse their payoffs
- Start an emergency fund
- Earn-save-spend, avoid the use of credit for as long as possible.
As we all know, “Little drops make the mighty ocean.”
The writer is professor, Finance, Amity Business School, Amity University