Step 1 - How to Start?

Step 1 - How to Start?

I was motivated by a friend of mine to write this article, not because he opened my eyes, but because I want to open his. He is just 24 years old and has a very bad habit of doing over expenditure. He works 6 days a week (sometimes 5, sometimes even 7). Every weekend he just has to go out and try some new restaurant, no matter how expensive it is, how good or bad reviews it has got. On being asked why don't you start saving, his typical reply is - "I want to try each and every restaurant. This is not the age of savings. I will start savings when it is time to."

Now, who shall explain him that now is the time. He just doesn't understand how important savings are in one's life. "Today's savings are tomorrow's returns" said a great man. Don't ask the name, even I don't remember.

Why to Save and what will you get?

Let me answer this using an example.

Say, you start saving. You save Rs. 10 daily. Is it a big deal? No, at least not for the time being. This means you saved Rs. 300 in a month i.e. Rs. 3600 in a year. Big deal yet? Naahhh. After 10 years tour saints will be Rs. 36000 - still not a big deal. 20 years - Rs. 72000 - ok now we are starting to get somewhere but still after 20 years even 72000 might now hold enough value, right?

Now what if I say, you can easily make your aggregate savings for next 10 years in Lacs?? Keep reading.. You will see what you all have to realise.

But this is just an example. Now list down the expenses that you do, which you can easily avoid. Like in case of my friend, his weekend fooding expenses are like 2k-3k (average Rs. 2500) that means he can easily save Rs. 10,000.00 on a monthly basis.  Re-performing the above calculations will lead to Rs. 12 lacs in 10 years. And this was just by saving the food expenses he could have avoided. Just list down your such avoidable expenses. I am not saying cut of all the expenses that way there won't be any sense left for saving money.

Now lest add another component to this value - "Compounding".

What is Compounding?

In lay man terms, I would say Compounding is addend on on your additions. Say you deposit 1000 rupees in you bank @ 10% compounded annually. In the first year, you get Rs. 100 as interest, nest year to get Rs. 110 as interest, then in 3rd year you get Rs. 121 as interest and so on. What is happening, you are getting interest on your previous interest as well.

In actual life, Compounding is done monthly/quarterly/half-yearly/annual basis. That means you can start earning interest on interest immediately after the first month as well.

Now getting back to the topic, above you have saved/avoided your expenses of Rs. 10,000 p.m. Now what to do with this amount? INVEST.

Invest? Yes. Where? There are numerous investment alternatives available - Equity, Debt (Debentures, Bonds etc.), Commodity (Gold, Silver, Nickel, Crude Oil etc.), FDs, RDs, Saving Deposits, Property, Mutual Funds, Deposits, etc. Each type of investment can be further divided into numerous instruments which each has its own expected return with different levels of certainties.

We shall pick the topic of "Where to invest?" in another article.

Now say you go for Recurring Deposits and decide to put in, say, Rs. 10,000 pm into your RD (the amount you saved above) Account which gives 7.5% p.a. return, compounded monthly. That means you will be getting effectively 7.76% p.a. This in turn means, that Rs. 10000 (that you had been saving by avoiding unnecessary expenses and investing it in a risk free way) would give you Rs. 17.85 lacs after 10 years, which includes the interest component of Rs.5.85 lacs (approx)

See, this is the power of savings.

So, start saving. Start from some where, a little amount of Rs. 100 will also be good to start with. Because in the long run as your savings will increase, so will the future return too.

- Jatin Arora

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