Human beings are a bundle of wants and desires and fulfilling them essentially becomes the goal of life. While a few lucky ones can meet all of them, a large percentage of people have difficulty meeting even their most basic needs. Many of these desires need financial investment, which is the crux of the issue. At the basic level, wants are limitless, but income is limited. At a deeper level, it is the fact that people are unable to save sufficient funds to achieve even basic goals such as retirement, child education, and marriage. Unfortunately, most people require more money than is available to meet all their needs.
Why do people struggle to save?
We all know that income minus expenditure is equal to savings. This means that if expenses are reduced, savings will automatically increase. However, due to peer pressure, the onslaught of social media, the proliferation of advertising, and the strong drive for instant gratification, people in modern society are more likely to spend beyond their means and impulsively. Moreover, the ‘earn more, spend more, borrow more’ trap often makes it challenging for individuals to save money. To make matters worse, financial topics such as the significance of budgeting are rarely discussed in many households. This approach is conducive to developing spending habits rather than savings habits.
Wealth Creation is all About Savings; Financial Expertise Matters Less
It is a myth to believe that wealth creation results from selecting the suitable asset class and investment, requiring extensive financial knowledge and sophisticated investment avenues. What matters most are adequate savings, discipline, and long-term investing.
One must have a 10-year or longer investment horizon for compounding to work its magic. Patience is critical to remaining invested even during volatile and adverse market cycles. Frequent portfolio changes would only increase costs and reduce overall returns.
Saving Should Precede Spending:
Changing spending habits takes time, planning, and dedication because spending is a routine behaviour. A lifetime of practice is required to develop a disciplined mindset. Financial experts advocate several approaches for making the mental shift necessary to put savings ahead of spending.
Start with a workable household budget
To begin, prioritise your expenses and create a workable budget. The 50:30:20 thumb rule is an excellent guideline: 50% of income should be used to pay off essential living expenses, 30% must be saved, and the remaining 20% should be spent on discretionary or lifestyle expenses. Spending less and living frugally should eventually become a way of life. One must shift the perception that spending more money results in a better life. In reality, the opposite is true. Spending too much money can lead to financial stress, debt, and a lack of financial freedom. Before you spend a single rupee on discretionary items, you must set monthly investment goals and strive to meet them.
SIPs can promote savings and disciplined investing.
Automating savings can be an effective way to reverse the order of spending and saving. SIP investment or recurring deposits can help save more money. As with the home loan EMI, which are committed payments that everyone wants to honour, SIPs can also be considered committed investments that must be made. And auto debit facility precisely does the same. It’s difficult to spend what you won’t receive, so it’s essential to limit the amount of excess money in your bank account or at hand.
Debt restructuring can ease cash flow pressures.
Tweaking the loan amortisation schedule by adjusting the tenure and rate of interest can bring the EMIs within a comfort zone. The thumb rule for EMIs is maintaining it at 30% of the income.
Takeaway
Long-term wealth creation requires reduced costs, setting priorities, automating savings, and being disciplined about saving and investing. Simply wishing for more savings to materialise is not enough. The only way to succeed in the face of all the distractions that can drain your bank account is to change your mindset and stick to your plan. To get going, one must make a beginning, and the time is now!
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