Last Updated on Apr 6, 2021 by Manonmayi
Saving may seem to be as challenging as earning when you live paycheck-to-paycheck. To add to this, most money-saving tips meant to attain financial freedom may fail you in instances where:
- Your spending exceeds your affordability
- Your debt overburdens your income
- You are unrealistic about your financial situation
Regardless, with your hard-earned money trickling through your fingers like sand, you may find yourself at your wit’s end. Therefore, it is high time you come in terms with reality and shoulder your financial responsibility in order to lead a life free of financial worries.
To help you in this mission, listed are 7 must-dos that are cherry-picked from million others.
Maintain a contingency fund to meet unwarranted expenses
First things first. You can’t live a worry-free life in the absence of adequate savings for emergencies. From urgent repairs and relocation to medical treatment and loss of a job, an emergency can come in various forms, and leave you at crossroads. Therefore, genius is in setting aside a portion of your monthly income into a contingency fund.
Maintaining an emergency/contingency fund is just like saving for a rainy day so you are prepared to weather come what may. Since an emergency offers little room for planning, keeping these points in mind will help you stay prepared:
- Maintain an adequate contingency fund, preferably equal to 6 times your monthly income
- Ensure that your emergency fund is liquid and accessible quickly; consider opening a separate high-yielding savings bank account so you can also earn reasonable returns on it
Pay yourself first by automating your savings
No matter how financially disciplined you are, you will have millions of reasons to spend. However, if you go about dipping into your savings, your finances are bound to deplete. You can avoid this by following the mantra of ‘saving first and spending later’. To start on the right foot, choose automation, a concept that can make your life easy and convenient.
One way to embrace automation is by asking your banker to transfer a fixed portion of your monthly income into your savings or investment account on a predetermined date. Alternatively, you can also rope in help from mobile applications that allow you to automate your savings. Either way, you will end up building a sizeable corpus over time, which you can align with various goals and meet them on time.
Roll your debts into a low-costing loan
While credit helps you achieve goals and dreams conveniently, it also adds to your liabilities. Moreover, multiple debts mean you have to pay varying interest rates and manage several EMIs. This not only makes debt servicing expensive, but also complicates the repayment process. A smart way to stay focused amidst such chaos is to roll your debts into a single low-costing loan.
Known as debt consolidation, this approach allows you to repay all your existing debts using a single affordable loan, which leaves you with a single monthly repayment and eases your debt burden. Besides, when you repay all your low- and high-costing loans in a go, you eliminate the high-interest charges, which result in significant savings.
Invest your salary hike instead of increasing your spendings
An increment in salary certainly lifts your spirits, after all, you wait all year long to afford a better lifestyle. While a hike can boost your purchasing power, most of it is eaten away by inflation, leaving a small chunk with you. However, steering the additional income towards your savings instead of splurging unnecessarily can go a long way.
This is because, when you invest the hike in your salary, you make your money work for you. Though you may not afford dining in a fancy restaurant more often than before or the latest sedan, you would eventually accumulate a sizeable corpus, which you can use to meet various goals such as saving up for a comfortable retirement or going on a world tour.
Follow the same mantra when dealing with a windfall or a one-time bonus. Remember, the trick is to toil hard, earn well, and save more while you can because tomorrow brings additional responsibilities, which demand you to be better prepared.
Plan your investments and taxes well in advance
Saving is easier when you plan your investments, as it gives you a direction and clarity. However, planning investments knocks down the best of peeps if they lack financial awareness, discipline, and clarity in terms of asset allocation.
To break it down, asset allocation means strategising your investments after careful consideration of the following essentials:
- Your risk appetite: low, medium, and high
- Your return expectation: guaranteed, reasonable, and high
- Your goals and timelines: retirement savings – 25 to 30 years, car purchase – 2 years, and down payment for a home loan – 3 years
Once you are clear with the above essentials, you will know how much to save and how long to invest your funds to reach a specific goal.
For instance, say that you are a risk-averse investor (one who can only stomach a low risk and expects guaranteed earnings over high returns) and are looking to invest for retirement, which is 2-3 decades away. Considering your objective, investing in bonds or FDs can be your best bet as they offer safety of funds and also yield fixed income. In contrast, if you are looking to build impressive net worth over time and are willing to take a higher risk in return, you can go for equities. These are risky options but are known to yield the highest returns among all asset classes when invested for a medium- to long-term.
But planning investments is not enough, there is a ‘tax’ component that you have to consider as well. Well, each and everyone under the sky likes to save tax and have all or most of their hard-earned money to themselves. However, paying taxes is mandatory, which has no escape. Here’s what you need to know to optimise your tax planning.
Tax planning means investing with a view to save tax. The government has introduced myriad tax-friendly investments such as PPF and NSC that yield handsome returns as well. In addition, it offers various tax benefits on other investments such as FDs, mutual funds, and equities. With access to tax benefits, you would certainly look for ways to make the most of them. However, you can make the most common and gruesome mistakes mentioned below:
- Invest heavily in tax-saving instruments
- Postpone your investments to end of the year
By investing solely for tax-saving purposes, you allocate funds in options that may not be in line with your requirements and thus deviate from the main goal. This, naturally, disrupts your finances as there are chances of not saving enough for specific goals within the associated timeline, which can be extremely taxing. So, bear in mind to plan your investments smartly such that you enjoy tax benefits while also saving for your goals without compromises.
These 5 hacks may seem to be simple to employ, and they certainly are. However, you can only reap the benefits when you inculcate these hacks into your daily lives. So, put off delay and take matters in your hands today to accelerate your savings for a financially sound future!
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