In order to optimize your earnings, the first thing to do is to determine what you expect to achieve with your savings. Everything else will flow from that, whether it is long term retirement planning or meeting specific short term goals.
Where you stay matters. Bengaluru is more expensive than Ambala. This will influence how much you will be able to save.
Why are you saving?
- For future contingencies (temporary loss of income, unexpected medical expenses, etc.)
- For predictable financial goals (Children’s education, marriage etc.)
- For a period when you don’t earn anymore (Retirement)
Here’s an interesting fact; while most young people saving for immediate goals (the new iPhone, bike, or car) is important, over your lifetime, the maximum amount of your savings should actually go into funding your retirement.
How much to save and how?
Step 1: Figure out exactly how much you actually get after taxes and deductions.
Step 2: Figure out your fixed expenses. How much do your spend on essentials like rent and food? Are you paying any loan EMIs, especially for a home or car? Your savings will come from whatever is left after this.
Step 3: Figure out your other expenses. How much do you spend on wants such as eating out or movies or gadgets? You should ideally save before you spend on these expenses.
Step 4: Now you know how much you can save. Your savings ideally should be at least 20% of your take home salary. This roughly translates to Rs 20,000 each month. If you are not getting this number please go back and review 2 and 3 and see how you can save more.
(Recommended reading measure your expenses).
Why 20% of salary?
A 20% savings figure is suggested because it balances saving and spending. If you start at 28, this is good enough but if you’re starting at say 35, a 30% saving rate is required. Also the earlier you start, the more you can save for your various goals.
However, saving your money alone is simply not enough. You have to invest it.
Why Invest?
Investing ensures your money doesn’t lose it’s value over time and you are well-prepared for any financial contingencies that you might have to face.
How to invest your savings– A basic guide
# 1. Max out your Employee Provident Fund (EPF) if your employer offers it
Why? – EPF is deducted before you even save from your take home salary. It is probably the longest duration investment you will have. It is also a good fixed income investment option as it provides the dual benefits of tax saving and decent returns. The best thing is that it doesn’t require any additional effort from you.
# 2. Invest any remaining amount for 80C into ELSS funds
This is to take care of your tax saving while at the same time investing in high return instruments. There is a 3 year lock in for ELSS funds, which happens to be the lowest lock-in for any tax saving product.
# 3. Invest 20-30% of your take home salary into Diversified Equity Mutual Funds
If you have a home loan EMI, make this amount as 40% of take home salary less the EMI amount.
Additional tip:Got your annual bonus? Invest 50% of it into Debt Funds. This is your emergency fund. Invest the remaining bonus in yourself – take a course, travel, do fun stuff.
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