Why should you save?
Let us begin by understanding the need to save. Saving money is nothing but building up a corpus that you can use for various purposes. From attending to an emergency such as a medical emergency to paying for a planned expense such as buying a house, your corpus can help you achieve life goals with greater ease.
There are multiple reasons for goal-based savings. Here is a list of the most common goals for which you should save:
1. For emergencies
Life often throws many surprising challenges in front of you and most of the time, you may find yourself unprepared for them. From your vehicle getting involved in an accident to your mobile phone getting stolen, from your parents requiring urgent hospitalization to your investments suffering due to slow market trends, you can never know what financial challenge lies at the next end. You, therefore, need to save some money and keep it ready for such unforeseen expenses. This is the most important reason why you should get into the habit of saving money each and every month to ensure you have enough with you when you need to address an emergency.
There are multiple factors that determine your emergency corpus amount like:
- Average monthly expenses
- Nature of your job, whether the government sector or private, whether temporary or permanent, etc.
- Your monthly outstanding liabilities like home-loan EMI, etc.
Pro Tip: Your emergency corpus can be any amount from 3 to 18 months of your family’s average monthly expenses. A quick calculation of Emergency Corpus = Average monthly expenses X 6.
Must-have products for emergencies, other than your emergency corpus, is a credit card and a health insurance plan for your family.
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2. To buy a house
The day you begin working and earning for yourself, you achieve the independence you always wished. The next step is buying a house and for that, you need to save periodically from your salary. Since a home is one of the three greatest requirements of life (along with food and clothing), you need to buy a home at some point in life. Start saving money early on in your career so that you will have a corpus to pay the down payment of your house and be financially capable of getting a home loan as well. This requires a lot of focus and so you should begin working on it without any delays or distractions.
3. To pay for your child’s education
It is every parent’s responsibility to pay for their children’s education. You have to save money for this purpose. Even if you are young and single, you need to think ahead and start saving for years to come when you will be a family person with a spouse and children. Rather than burdening yourself later, start planning and saving right away so that your children get the best education and you can pay for all the expenses without the situation getting too economically burdensome for you.
Read our tips to Financial planning tips for parents
Pro Tip: Education inflation is more than 10% in India and is ever-rising, especially for higher and professional education.
4. To pay for your child’s marriage
Another massive responsibility that you have to fulfill in life is to see your children settle down in life. Apart from their education, you also need to save for their marriage. If your children are young now, begin planning and saving so that you have enough time to build up the necessary corpus. There are some very handy investment schemes such as the money-back child insurance plans, post office saving schemes such as the Sukanya Samriddhi Account, etc. that help you to save for your children’s future needs such as their marriage. Look for such investments and save in a smart manner.
5. To plan for your retirement
You need to save sufficiently for your post-retirement years. Remember, as soon as you turn 60, your income will stop overnight. The pension you receive may hardly be good enough to support your lifestyle. Rather than having to depend on your kids, you can stay financially independent and secure only if you plan ahead. Start saving for your retirement immediately. No matter whether you are in your 20s, 30s or 40s, it is never too early to start saving for this purpose. The earlier you begin, the easier it will be for you to have more money for the twilight years of your life. You can use the money in your retirement years to pay for your daily expenses, for your medical bills or simply to achieve your life goals such as travel.
There could be various other reasons for which you might have to plan and save ahead of time. The reasons would vary from person to person and can range from sister’s wedding to a foreign trip to parent’s health issues to almost anything.
All you need to do is, identify the goal and then save systematically towards the same in a disciplined manner.
These are some of the main reasons you need to save your money. As you can see, some of these require a longer saving-period and some shorter. You need to understand your life goals and then start building the various funds accordingly.
Types of financial goals
As mentioned above, people save for various reasons. While some of these are to achieve a dream related to their leisure, others are for practical and sustainable purposes. So while you need to save for a lavish vacation, you also have to save for your retirement years. Financial goals are nothing but targets you set yourself and the monetary arrangements you make to achieve them. Financial goals are usually divided into three groups:
A. Short-term goals
Short-term financial goals are those goals that you need to take care of in the immediate future. Ideally, you need to have a corpus ready for these goals. But you can be disciplined with your expenses and savings and provision for these goals as and when needed. Most of the short-term financial goals are repetitive in nature and you need to address them at regular intervals. The only way to be prepared for these goals is to make a budget and strictly stick to you. You need to have control over your expenses in order to save enough money to fund the short term financial goals and also to save for the mid and long term goals. The most common short-term financial goals are:
a. Paying EMI’s for the various loans you have
b. Clearing the monthly credit card bills
c. Arranging for annual family vacations
d. Getting the best health insurance cover for your entire family
e. Indulging in self-care
Tenure for short-term goals:
are usually from 0-2 years.
Top investment products for short-term goals:
can be a savings bank accounts (with 4-7% ROI), Bank Fixed Deposits, Liquid and Debt Mutual Funds, etc.
B. Mid-term goals
Next, we have the mid-term financial goals. These are some of the most crucial goals that you need to provide for. Unfortunately, and rather dangerously, many people tend to deprioritise these goals while they focus on the short term and long term financial goals. Mid-term goals are those goals which you need to meet just a few years down the line. You don’t have to wait until your retirement nor take care of them at the end of the month. The mid-term financial goals are in fact some of the most common life goals we all encounter. You need to build up sufficient funds for these goals to ensure you do not stumble along the way. Some of the common mid-term financial goals include:
a. Getting married
b. Having a baby
c. Clearing your student loan
d. Buying a house
e. Starting a business
f. Taking care of your parents
Tenure for mid-term goals:
are usually from 2-5 years.
Top investment products for mid-term goals:
can be Bank Fixed Deposits, Debt Mutual Funds, Gold, etc.
C. Long-term goals
A lot has been said and discussed the long-term financial goals of a person. You must have heard many people tell you that you need to save for your twilight years. While retirement is definitely one of the most crucial long-term financial goals, there are other goals that require planning and saving over a long period of time. It is a good idea to start saving early on in life for the long term goals so that you can save in small amounts and still end up with a large corpus. Some of the common long-term financial goals include:
a. Saving for your retirement
b. Sending your children to the best foreign university for higher studies
c. Buying a lavish villa at a good location
d. Owning multiple properties
e. Travelling the world
f. Buying an expensive car such as a Lamborghini
Tenure for long-term goals:
are usually more than 5 years or so.
Top investment products for long-term goals:
can be Equity Mutual Funds, Real Estate, Direct Equity, etc.
Do read: Complete guide to financial planning
How to save towards your financial goals?
Now that you know more about financial goals and their importance, you need to start saving towards them. Here are some handy tips to help you along the way:
Step #1 – Set S.M.A.R.T. goals
S.M.A.R.T. is an acronym for Specific, Measurable, Achievable, Realistic and Timebound.
Always remember that the life goals you set for yourself will be different from those that your friend has. Life situations vary and no two families are the same. You have your own set of responsibilities. For instance, your friend may be a single person who lost his parents as well. He does not intend to get married and so he is saving extensively for a world tour. On the other hand, you are a father-of-two and have dependent parents as well. Your financial goals would then primarily revolve around the well-being of your family members. Thus, setting specific and relevant financial goals is the first step in the process.
So, you need to identify your goal and then make it S.M.A.R.T. For example, your financial goal could be “Child Education”.
But you need to make it Specific, Measurable, Achievable, Realistic and Time-bound by making it “Child Education Expenses of INR 1 CR after 15 years”.
Step #2 – Segregate your goals and pen it down
As discussed, financial goals are classified into three groups – the short, mid and long term goals. You also need to identify your goals and sort them accordingly. You need to have a fair idea of your goals and by when you need to achieve them. This is a vital step as you need to have different savings mechanisms for each type of goal. For instance, you may depend on a fixed deposit to pay for your annual family vacation and a mutual fund to pay for your daughter’s wedding. It is thus crucial for you to know the timeline and segregate your financial goals to plan better.
Actually penning your financial goals down is one-step towards the same, as it is etched in your mind forever.
Step #3 – Make a monthly budget – Expense Planning
It is extremely helpful to make a monthly budget as that is the point from where you can begin your financial contributions. After all, the savings need to come out of your monthly salary. So you need to make three divisions, one each for your income, expenses and savings. Calculate your monthly household expenses and other payments that you cannot avoid. This would include outstanding EMI’s etc.
Once that is done, calculate the amount of money left. Then, decide the amount of money you want to leave in your savings bank account as an emergency fund and the amount you want to invest. Once you have a plan ready, it will become easier for you to save for your financial goals.
Step #4 – Keep the saved money away from your wallet
Store the money you save away from yourself, in a savings bank account or lock it up in investments. If you have money lying around, you will be very tempted to spend it. Since discipline is important, you need to keep all distractions away and save with complete diligence.
It is also important to note that you need to be responsible with your credit card usage. When you do not have the cash with you, do not simply keep using your credit card to pay for unnecessary expenses. This will defeat the purpose and you will fail to save appropriately for your financial goals.
Step #5 – Invest properly – Choose the products carefully
And finally, you need to invest properly. There are several investment options available to you. While some like fixed deposits are low risk, others such as equities carry some risk. The yields from each type of investment are different. It is extremely important for you to understand the type of investment, its mechanism and return offered. You also need to correlate the investment with your savings needs and see if the returns would be of use to you. If you are not sure, speak to a financial advisor and then choose the correct investment option. Making an error here can prove to be very damaging and can hamper all your future financial targets.
Step #6 – Annual Review of your Investment Portfolio, Goals and re-aligning the same
This is a super important step in your Financial Planning called Review. This needs to be in line with your asset allocation and risk profile.
Only when you Re-view your portfolio, you would be able to analyse the same and check if your portfolio is following the desired path. If not, then a re-alignment of the portfolio might be necessary.
Also, goals keep changing and evolving with time. Annual review and analysis of the investment portfolio can be a healthy check on the progress of the same so that there is no shortfall when the goal is near.
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What to keep in mind while planning for your financial goals?
To be able to save properly and build up the highest corpus, you need to keep the following factors in mind when saving towards your financial goals:
1. Factor in inflation
Inflation is a factor that you must keep in mind when you save for your future financial goals. Remember, an item that costs Rs 1000 today may cost Rs 5000 in the next decade. If your dream villa costs Rs 2 crore today, it will probably cost Rs 4 crores* in 10 years’ time and so you need to save more. Unless you factor in the inflation, you will not be able to achieve your financial goals in a manner you wish to do so.
*In average inflation in India is 7.66% in 2019.
2. Invest according to your asset allocation and risk appetite
As stated, some investments carry a low risk and others carry a higher risk. When you invest, keep an eye out for the risk factor. If you are a conservative investor, choose investment options that are suitable for you. If you are more of a risk-taker, invest in higher-risk instruments. Be comfortable with your investments as only then can you invest properly and achieve your financial goals in time.
Asset Allocation is an allocation of your investment portfolio for portions of debt, equity and other products like real estate, gold, etc. based on an individual’s risk-taking capacity (i.e. risk appetite).
3. Be realistic when setting your goals
And finally, you need to be very realistic about your life goals. Everyone wants the very best of things in life, but the hard reality is that not everyone can afford everything. If you are a mid-level salaried executive, you possibly cannot have the things a movie star has! So be realistic about your financial goals and set achievable targets for yourself. This will help you to save properly and fetch you the goals in a hassle-free manner.
Basically, make your financial goals S.M.A.R.T. and then work towards the same in a systematic and planned manner.
Discipline is the key here. You need to be disciplined and stay focused at all times. If you lose the eye on your goal, you will shift from the path and achieving your financial goals will become a real challenge thereafter. To avoid this, be as disciplined with your money as you possibly can. Keep your eyes on the targets you have set for yourself and achieve your financial goals with ease.
To wrap it up
Goal-based savings are essential and allow you to manage your money properly. As we saw, there are different categories of financial goals. You have the short-term goals, mid-term goals and the long-term goals. The different goals cater to different life situations and needs and must be addressed accordingly. Keep all the points mentioned above in mind and begin saving for your financial goals. Once you are disciplined and focused, you will be able to achieve all your financial goals with ease.