Hi there. So what happened? You called me on a Saturday evening . you said you wanted to talk about saving and importance of saving. Weren’t we supposed to meet at the mall. I have to shop for some new clothes . And I need a new suit. I am thinking of getting a new credit card with better limits .you know, the cash back is a a great
Me: Hi Bob. So good to see you. I called you to discuss about your Financials. More precisely about ‘Why you should start saving’. See, I have prepared some topics related to saving. You are going to enjoy it. Best use of your time. Besides, you are my friend and I can’t see you recklessly spending money.
Bob:So, here we are. The same boring topic of ‘saving’. Why are you doing this to me. I trusted you with my time and you are just telling about the same old saving. I don’t wanna hear about it. Besides you and I can go shopping. It is more fun and exciting. You are really boring. Get an exciting life. Come with me. We will enjoy and have a dinner in a good resturant tonight.
Me: Please Bob.
Bob: Ok, just blab whatever you have to say. One more day goes to waste.
Me:You won’t regret it. I should have told you this much earlier.
Ok now listen. It is important for you to save. It is nothing new, but is required to have a better quality of life. So let’s start. The first one of the list is having some cushion in life.
- It gives you some cushion in time of immergency . (Medical, legal, family etc) : I am not joking here. What if the medical expenses are more than what your insurance will cover. There are many types of expenses that are not included in health insurance. Then the legal battle in many countries tend to go on for years. In India it generally takes a lifetime for settlement. Cases running for 20-25 years is very common in India. It takes money to get into the battle and it takes huge sum of money to hire a good advocate. Plus proof gathering and other activities can lead to huge investment in the battle with no guarantee of positive result. And then any of the Unsatisfied party can appeal in the upper court. Another set of investment required. This leads to our next point.
- What if you want to change your career : How much do you like going to your job on Mondays. And from that we assume how much you like your job. So if you want to change your career, it is not necessary that you will be recruited with same pay package. There may be some differences. So you need to have some thing in your pocket to deal with it. And what if the company is suddenly making loses and it decides that it is because of you. So, you either leave or decide to work for free. But your home expenses are as usual. You need some money. Right? Hey! I am trying to help you. Don’t look at me like that Bob. Tell me. What ever I have said till now, holds some water or not. It may happen and we need to have something to hold on to our lives.
- May lead to investments: After you have saved money, some of it may go to investments. To get higher returns.
- Can help pay for your child’s college: School and college fees these days are skyrocketing. Do you want your child to take loan for it or go in debt? U bet you don’t. So, planning and saving for your child’s education is a good cause. You agree with me on this. Which brings us to our next topic.
- You don’t have to work after retirement: What are your views about inflation these days. Prices of goods are increasingly becoming more. So, you need more money to keep up the lifestyle you are having now . how do you suppose to keep up the lifestyle you are into in years to come with no income at all when you retire . you need a plan and you need to save. Or do you plan to keep working in your golden years. Think about it. You will probably need two to three times the amount to sustain your lifestyle. Or you need to scale down. It is your choice now. Then, it will be a compulsion. Save your self and your family form the humiliation that they will be facing if you don’t face this reality now.
- Saves from getting into debt: Now Bob tell me one thing. If you continue with the same habits of not saving, what is going to happen. Today you have a good job. It pays well. You can enjoy. But someday you are going to retire. Your salary will stop. You will have to start your social security for your living. May be a pension. But it won’t be as much as you get now. How will you keep up with your lifestyle? May be you are going to ask someone for money. May be they will give you. But sooner or later they will ask you to pay back. How will you pay back the money you owe him or her . May be you will sell your stuff or your home. Because you have to pay. Whatever it will be, it won’t be making you happy. So, why not make some arrangements to lessen the chances of it. Do something. Start Saving for God’s sake.
- Inflation factors:Although I have already mentioned it, it is a dangerous topic. I can’t stress more about it. Inflation Increases the cost of most of the things in the economy. As a result you have to shell out more for the same product. This is also called more spending for the same product. As the time passes, the price increase is visible. I have witnessed many retired people who once had a great lifestyle, but now had to scale down on their lifestyle. Many went into poverty. It is a very horrific situation . Having money certainly helps us in managing it better. It is better to start today than to be sorry later.
- Sense of Security: Now tell me one thing. Imagine your younger daughter asks you to take her to a nearby shop to get a chocolate. As you love your children so much, you become ready and take her to the nearby shop. In the mean time, as you reach the shop you observe that you forgot to take your wallet. If the shopkeeper knows you, he may offer to have the chocolate on credit one time. But what if your shopkeeper asks you to bring money. You have to return and get the wallet in order to buy the chocolate. Now after some days, again your child asks for a chocolate or an ice-cream. As you walk near the shop, you suddenly remember what happened the previous time and you instantly check for your wallet. It is there and now you confidentiality walk into the shop. You have a sense of Security that this time you don’t have to be embarrassed. You have the wallet. Money gives you a sense of Security. You don’t have to request for a credit for common things. Although the above incidence can happen to anyone, it still gives you a sense of what I wanted to say.
Have proper diversification in the saving: I mean to say that you don’t wanna keep all your money in your saving bank account. Some of it may be in it, rest is required to be deployed in certificate of deposit, other may go to index mutual fund. You should also contribute to provident fund. Proper Insurance is also required. Pension funds are also not be ignored. You may buy some stock options also. Please consult an advisor before investing in share market and mutual funds.
Don’t ignore equity: Keeping inflation in mind, equity is an important part of the saving and investing. After consulting with your financial advisor, you should definitely put some of your money in it. But do keep in mind that you better keep it for long term. In the short term, share market works as a gambling bet. You may win but that is something which is going to be very rare. You will most certainly make a loss in the market in the short term. So, don’t gamble with your hard earned money. Play safer. Invest for the long term.
Take risk as per your appetite: Stock market/ Share market involves movement of prices which is dependent on different factors in the market. There are times when prices rise without any reasons and also the other way. So, it it not as safe as bank deposit or government bonds. That being said, stock market is reasonably safe in the long run.
Now enough of why you should save. Now let us talk about how you are going to start .It is a common advice to start saving around ten percent of your income. It is a neither small nor very big and hence easy to start. Most probably you will stop noticing it by the end of third or fourth month. You should always maintain one separate account for saving and investment purposes and not hold an ATM of the account. Thereby making it inconvenient to use for common expenses. Slowly as you keep growing the saving, you will generate an interest and will likely increase your saving rate. After some time, probably you will venture into investments and real estate and other avenues of investment.
Now tell me Bob. Did you like it or was it a waste of time?