Saving: First step towards Financial Independence
Saving, in simple words, comprises the amount of money left over after spending. Methods of savings include putting money in a deposit account, pension account, investment fund, or cash. Let us take an example. John’s monthly salary is rupees 90,000. Out of this money, he has to pay rupees 30000 for rent, 15,000 for credit card payments, and 20,000 for groceries and other essential utilities like petrol, car payment, etc. Adding up these expenses, he will have 25,000 rupees left over. If John saves this money for future use, then he can easily invest this money into deposit accounts and withdraw it in case of emergencies. He will also earn money by this as banks provide a specific rate of interest on deposits. Saving money looks like a relatively easy task, but in reality, it is much more complicated. Most people are not able to save an adequate amount of money for their benefit. According to a recent survey conducted in 2019, the nominal average income of a farmer in India is rupees 10,329 per month. To overcome this problem, a simple rule called the 50/30/20 rule can be used. According to this rule, we must separate our total budget into three categories, that is, needs wants and savings/debt. Out of our total income, we should use 50% of our needs, 30% for our desires, and 20% for our savings/debt. This rule can help you save more for emergencies and also to make you earn a paycheck over a paycheck. Now, let us talk a little about investing, its explanation, and some essential tips for investments. Investment is, in simple words, a process of buying assets to generate returns. The generated return can be in the form of “regular income’ or ‘capital appreciation.’ But what is capital appreciation? Capital appreciation is the difference between the purchase price and the selling price of an investment. The main aim of investing money to buy assets is to generate high returns. This is because investments have the potential to yield high returns. Let us see how an investment works. Out of your total money, let us say that 65% is spent on your necessities and wants. So, you can invest the leftover 35% of your income to generate returns. This will lead to income generation, which will help you earn money. Now let us see the problem of when to invest. It is always best to start investing as early as possible because it takes time to gain high returns. For example, if you are 40 years old, and you need 50 lakh rupees as your retirement corpus, then you have a good 20 years left before retirement. Assuming about 15% average returns, you will have to invest 3381 rupees every month. But if you are 30 years old, and need the same money with the same interest, then you will only have to pay only 731 rupees each month. This is because you will have ten more years to earn that amount of money. In the end, I would like to start a small tradition to tell you all a fact or a quote about the topic we talked about. I want to end this with a quote Warren Buffet once said, ”I made my first investment at age eleven. I was wasting my life up until then.”