Save from young page

outlookmoney By outlookmoney, 31st Jul 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/31zpstfc/
Posted in Wikinut>Money>Saving

If you start saving from the age of, say, 25, when you are likely to be in your first job, you can save around 10 per cent of your net income till the age of 30, by when you are likely to get married. Here, if savings dip a bit, the headstart gives the advantage.

Save from young age

Savings, alike all good habits should begin at an early age, as otherwise we are likely to get into a financial mess in the later stages of our life.

HOW IT HELPS

The advantage of starting out early is the enhanced duration a child’s savings gets before the corpus is put to use in achieving the goals. Start saving early and stay put for long, that is the golden rule. In savings, the early birds always have an advantage over the late flyers through the power of compounding. The long-term return potential of equities, historically, remains the highest.

WHAT’S COMPOUNDING

The rule is to start early, invest regularly and reinvest the returns. This is the way to increase your capital. Let’s take the example of Sam, who invests Rs 2,500 every month from the age of 25, and Sid, his friend of the same age who starts investing Rs 5,000 per month at the age of 35. When both of them turn 45, on a realistic 12 per cent return, Sam’s kitty is Rs 22.78 lakh, while Sid’s is nearly half as much at Rs 11.09 lakh, despite Sid having invested more than Sam.

CHALLENGES

During student life, the focus is on spending, and investing takes a back seat. The importance of saving small sums of money is lost and more often than not, pushed to a later date. Investing is also perceived as a cumbersome process, and questions abound on what and how to buy.

SOLUTION

A good way to save is through mutual funds (Mfs). Set aside a certain amount of income for MFs and manage expenses with the balance. This helps in making ‘forced savings’ and also gives one a financial headstart. The same principle holds true when it comes to investing in equity MFs, a time-tested vehicle for meeting long-term goals. But make sure to do the basic groundwork before venturing out.

KNOW YOUR MONEY

Budgeting helps in setting the pace and direction of your financial actions. So, figure out your cumulative income— fixed and variable—and expenses, and set targets and priorities for each.

EMERGENCY FUND

Before setting a savings target, prepare for contingencies. Maintain a contingency fund to take care of 3-6 months’ expenses. You can have these in your savings account with a sweep-in, or auto-sweep facility, or in liquid funds.

COVER THE RISKS

After setting up your contingency fund, cover the risks, primarily to life and health, as well as a home, if you have bought one. This will help you protect your assets and keep your financial plan on track. Take a term plan if you have a financial dependent. At young ages the premiums are the cheapest.

PRE-EMPT SPENDING


Once you have set aside the cash required to cover you for exigencies, set your savings goals. Follow the pattern— earn, save and spend, Allocate funds to your long-term dreams and use the balance on living expenses.

CONCLUSION

If you start saving from the age of, say, 25, when you are likely to be in your first job, you can save around 10 per cent of your net income till the age of 30, by when you are likely to get married. Here, if savings dip a bit, the headstart gives the advantage.

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Tags

Investments, Mutual Funds, Personal Finance, Savings

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Ravi verma has been working with outlookmoney for long time and handling social promotion activities at outlookmoney.

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Comments

author avatar A K Rao
6th Aug 2012 (#)

Thanks you very much dear Outlookmoney for a detailed article on how to and why to save money at young age! Nice one!

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