One of the toughest questions every millennial in India needs to deal with once they start earning is how much money they should save. Savings has played an important role in financial management for generations in India, but with the emergence of easy EMI and renting assets such as motor vehicles, consumer electronic goods, furniture etc., the concept and mindset of savings has undergone a drastic change within the minds of the current generation.
Previous generations, which included our parents and grandparents saved money to buy a house, motor vehicle and large purchases, whereas the current generation is saving to travel, invest and create wealth and enjoy the finer things in life. This possesses a vital question which is often left unanswered, how much should you save?
Follow the 50/30/20 Rule
Irrespective your monthly income, the age-old 50/30/20 rule is still applicable to the current generation. The 50/30/20 rule states some guidelines for individuals how to spend their monthly income in a manner which takes care of their expenditures, lifestyle expenses and significant expenses, encourages savings and investment to create wealth.
The 50% Rule
The 50% rule states that an individual should use half of their monthly income, i.e. 50% of the income towards taking care their necessities, i.e. home loan EMI or home rent, food, utilities, travelling and conveyance, clothing, income tax, communication expenses and other necessities.
The first step towards this is preparing a budget and tracking your expenses. This allows you to understand which expenses are essential and which are not. It also helps in understanding where you might be overspending and reduce your expenditure.
The 30% Rule
The 30% rule states that an individual uses 30% of their income towards making discretionary expenses. This includes expenditures towards entertainment, making big-ticket purchases such as motor vehicles, the latest smartphones, the latest consumer electronic products, vacations and any other expenses at the discretion of the individual.
Saving does not mean compromising on all the good things in life, but it implies enjoying the luxuries of life, but while remaining in a budget. You can spend a portion of the 30% of your income every month whereas saving the rest for the more significant expense.
Individuals can also track these expenses and prepare a budget towards enjoying much more finer things in life and spending less money. For instance, at the time of upgrading your existing smartphone or the latest consumer electronic product, you can opt for an older generation product rather than the most recent product, as it can them you a lot of money while allowing you to enjoy a brand new smartphone or a consumer electronic product. Similarly, you can visit your favourite bars and pubs during happy hours, where you can have a good time at a discounted price.
This method of saving and spending allows you to enjoy certain luxuries of life while remaining within your budget. Every major purchase should be treated as a milestone, i.e. every time you save enough to cross an item off your wish-list, it needs to be treated as an achievement. This will further motivate you to remain disciplined in your spending, and save money.
The 20% Rule
The 20% rule states that you should save 20% of your monthly expenses towards creating a safety net, making an investment, clearing your debts, accumulating down payments for substantial ticket assets such as a motor car or a house.
Our grandparents often tell us to save some money for a rainy day. This 20% savings holds the key to your financial independence and acts as your safety net in times of economic difficulties or financial emergencies.
You need to put this money away and forget you even have this money to spend. Once this jar accumulates a lumpsum amount, which is over your 3-6 months expenses, you should consider investing this excess money instead of allowing it to remain idle and let inflation devalue your savings.
It is highly essential that you do not touch this money at any cost unless there is a financial emergency such as loss of employment, hospitalisation of a family member, emergency house repair expenses or any other expense which can be categories as an ‘emergency’.
Where to Save and hold these savings
It can be regularly tracking and budgeting each an every penny you spend, and it can also be highly impractical. The best way to follow the 50/30/20 rule is maintaining 3 different accounts to store these funds.
The 50% of your income which is dedicated towards your necessities expenses can be held in our salary account or your regular savings account. These accounts offer a low rate of interest but allow account holders higher flexibility to withdraw their funds using ATMs or pay for their expenses using their debit cards.
The 30% of your income which is allocated towards making discretionary expenses can be held in recurring deposits or fixed deposits till they accumulate ample funds towards making their high-value purchases. Many banks offer flexible recurring deposits which allow you to accumulate their target amount to finance purchases of big-ticket items such as motor vehicle, latest smartphones and consumer electronic items, fund your dream vacation etc. Most banks offer attractive interest rates on recurring deposits and fixed deposits, which allow your savings to earn interest and grow.
The 20% of your income which is allocated towards savings and investments can be held in multiple methods. Your 3-6 month safety net can be held in interest-bearing instruments such as fixed deposits which can be easily liquidated as and where required. Individuals can also invest this portion of your savings Systematic Investment Plans or SIP or mutual funds which will allow their savings to grow and create wealth for the individual.
The Verdict
While it is not necessary to stick to this exact proportion each and every month as your expenses and savings can vary month-to-month. What is more important is to adhere to these guidelines, spend less, save more and improve for financial position. The 50/30/20 rule will help you understand where are you spending, on what are you spending, how much are you paying and help you answer do you need to pay so much.
The 50/30/20 rule helps you reduce your expenses, increase your savings, improve your financial position while ensuring you are not devoid from the good things in life and enables you to invest and create wealth for your future.
Savart is a SEBI-registered investment advisor, founded by Sankarsh Chanda. The purpose of this content is to educate, not to advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations.