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Income minus investment should be expenses

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The Indian diaspora has been known for having small savings. Indians are probably the most scrupulous small savers in the world. But, often there is a gap in the expectations. The individual often does not start saving in time and the goals they set are too high for the effort put into saving for them, creating frustration.

The thumb rule therefore should be that Income-investment = expenses. If you are young and have few responsibilities you should be able to save 30 % of your income. Discipline is the key. It is very important to start a savings plan that takes care of investments at the beginning of the month so that you are not tempted to spend that money on other things. As years go by and responsibilities increase the zeal to invest becomes less.

The ‘mantra’ should never be compromised. As responsibilities grow, so does income. Keep aside a buffer for 6 months as liquid money and invest the rest as per your financial plan. Invest wisely as this corpus will help you achieve all your goals.

First set your short term, mid-term and long term financial goals. Short term goals are the ones that need to be fulfilled within 2-3 years and may include a vacation, a down payment on a car etc. These can be reached by investing in short term debt funds, liquid funds or even a 3 year recurring deposit in your bank.

Mid-term goals would be life events you plan for in about 3-8 years. They may be goals like paying a down payment on your house, marriage and a foreign vacation. These can be planned for by saving in traditional investment options like Fixed deposits and recurring deposits, or by creating Systematic Investment Plans in Mutual Funds.

Long term goals like saving for a child’s higher education, marriage or retirement have tenure of over 8 years. These goals can be reached by using Mutual Fund SIP’s, Public Provident Funds and other instruments that are long term savings tools. Discipline and consistency is the key to optimal savings.

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