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Savings Budget - What a Millennial needs today

Monday, June 11, 2018
By Amar Pandit

Amar Pandit, Founder & Chief Happiness Officer,

According to The Los Angeles Times, in 2013, American sprinter Marion Jones was down to her last $2,000. This was the same athlete who won five medals, including three gold, at the 2000 Sydney Olympics, the one who shone on magazine covers, and signed multi-million dollar endorsement deals. By 2007, she has been declared bankrupt. Heavily under debt, she was forced to sell off her properties to raise money for sustenance.

The movie Tara Rum Pum too was based on the same premise. Saif Ali Khan portrayed a race car driver who traversed the similar path of being wealthy to insolvency. Basically, the moral’ of the story was “One should save for a rainy day and plan well for the future.”

Similarly, there are plenty of riches-to-rags stories of business tycoons, builders, brokers, media celebrities, and sports stars who had to declare bankruptcy, due to several reasons. Some of these included:

1.    Faulty business plans
2.    Excessive concentration of assets in one asset class
3.    No written plan for managing money for the future
4.    Inadequate savings to maintain one’s current lifestyle in the future
5.    Purchase of unproductive assets

The era we live in presents countless opportunities and varied income levels. At the same time, we also have more ways than ever before to consume and spend. This is because as income has undergone a raise, so has the kind of lifestyle being led, the cost of goods being consumed. increased connectivity and modernization has added to this conundrum, with coffee shops, pizza parlours, designer clothes shops being found in even smaller towns.

The thing to remember is that those who appear rich might not actually be rich. It is more important to have a high net worth rather than looking like you have a high net worth. The point is never how much you earn, but how much you manage to keep—and more importantly, how much you put to productive use by investing. People who earn in thousands can become crorepatis by diligently following the path of savings and investments.

At the same time, there also exist people who have earned in crores but have later faced bankruptcy. This is because they gave more importance to their current lifestyle ratherthan saving for a rainy day or securing their future. It’s a marketer’s job to strike an emotional chord and get one to buy things that they can’t afford, don’t need, and perhaps don’t even want. People often give into impulse buying without considering what such purchases are doing to their financial lives. While “I enjoy each day to the fullest” or “I never plan ahead” may sound fashionable, but it certainly is not prudent and may even prove to be detrimental to one’s financial health.

In such times, the basic rule of finance gains importance; to not just properly plan finances to lead a good life in the present to but also to save enough to provide for the future generations. Following this rule makes it a lot easier to save the money that one earns, without having to compromise on one’s current lifestyle.

While there is no magical formula to make sure that you can create enough savings, creating a savings budget as opposed to a savings budget can go a long way towards creating a corpus for the future or an urgent need.

The best way to save but at the same time, indulge is to keep a savings budget as opposed to an expense budget. This is because if one maintained an expense budget for oneself, they would control themselves from making any major purchases in the short run. Eventually however, the expense budget would fail because not everyone has the capacity to be disciplined enough to follow one.

In a savings budget, the target is to make a certain amount of savings per month. The idea is to set a savings target of 15-25% of one’s gross annual income and deposit this money in a mental account called “My Goals”. This will help to deploy one’s savings productively in investments, whether cash, debt, equity or real estate. The only focus here should be on following the plan judiciously. In the long run, this practice will help in maintaining one’s lifestyle needs without having to compromise one’s financial health.

A gentleman I know adopted the “Pay Yourself First” principle with very modest amounts of Rs. 50 and Rs. 100, starting in the 1970s. He kept this up for 16 years, until about 1995, after which he saved relatively less. In 2003, his portfolio was worth Rs. 5 crore, and in 2007, around Rs.12 crore.

Building up your nest egg is just as important as making money. How you spend your income today determines what you will be able to do tomorrow, and this holds true regardless of whether the corpus grows or shrinks. “I’ll definitely start saving when I make more money” or “I don’t make enough to save, so I should first start saving today by setting aside at least 15-25% of your income, your future will be more comfortable and whole lot more secure. So, it’s best to start now because it’s never the wrong time to do the right thing.

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