Savings - An Essential Step in your Journey to Financial Freedom

A few years ago, at a seminar on micro-finance, one of the speakers asked us participants “What is Savings?” Most of  the participants were from finance and banking backgrounds, and so our definitions of savings were typical – excess over  income, that part of current income not spent now.

The speaker had a different definition – “Savings is the first item of expenditure”. I think this is the most intelligent way of looking at savings.

Almost this same idea has been articulated by others when they said “pay yourself first”.

It is very hard to save money, especially getting started and going through the first four to six months. Only if we approach savings as the first item of expenditure, put this money away, and think of the balance alone as the amount available to us for our expenses, can we put in place a systematic savings plan. 

To make regular monthly savings you need to have a separate account in which you will keep the savings. This will be different from the account from which you pay for your expenses. It would be better not to have a cheque book for this savings account.

Systematic investment plans offered by mutual funds is another way for regular savings. You agree to put in a fixed amount into the fund every month for a certain number of months. The amount is invested by the mutual fund, and your returns should usually be more than what a savings account will bring you.

Regular, systematic savings brings the power of compounding to grow your savings. You can check the magic of compounding on the “calculator” link on the site.

The power of compounding can be enjoyed even more fully when you start saving early.

Many experts suggest that you save between 5 and 10 percent of your monthly income. This is difficult for most people. You must set a realistic target for your savings, and stick to it.

Why do you need to save? The most compelling reason is to have money for contingencies like an incapacitating accident, illness, getting “right-sized”. Other reasons are children’s education, a fund to enable you to retire. A more short term reason is “deferred gratification” – save now in order to be able to get something tomorrow that you will really enjoy!

To see how urgent it is for you to start on your savings, do the “stock-taking” suggested here