Baby steps to developing a savings habit

Photo: Bank of Baroda

Money is always a sensitive topic to talk about. Often, most of us don’t have enough and on that note, financial planning seems to be a futile effort at managing what we don’t have. The gut instinct for most of us is that we aren’t financially stable enough to save or consider planning their finances. Once procrastination starts to take over, the motivation to start withers out and years turn to decades, spinning a vicious circle of bad finances and credit ratings.

Starting early is the trick to success when it comes to managing money. And contrary to common belief, irrespective of how much you earn, planning finances is necessary. Financial planning is important even for students who don’t earn or are on student loans, scholarships or being financed by their parents.  Rise above your fear and start by doing (or at least start some of) the following.

  1. Open a separate account for your savings: If you keep all your money in one account, you won’t have a clear idea of your finances. Opening a second account can be done through online banking and only takes a few days to do. It is important that you don’t link this account to your debit card so that it remains true to its purpose.
  2. Make a monthly budget: A budget need not be a fancy spreadsheet with complex formulae. You can keep it as simple as you want it to be. You could use one of the many free apps available for this purpose. If apps aren’t for you, then a simple excel sheet works for most people, where you can list your income sources and expenses in chronological order. It is important to categorize expenses into specific categories that you require (such as food, transport, university expense, bills, entertainment, charity etc.) so that you can total these categories at the end of every month which in turn gives perspective on your spending habits. On one sheet create a monthly forecast that runs for 3-5 years, and it will show you how your savings accumulate over time. With one month per row, a five-year budget is only 60 rows long and visualizes your future finances.
  3. Set realistic targets: You know your financial situation best so spend some time contemplating your targets. The first thing to decide on is how much you are going to save and transfer that amount to the account you have dedicated for savings. Set an objective for how much you plan to save by the end of 3 years, or 5 years etc. Usually saving is calculated as a percentage of income, so that when your income increases you are geared to save more. The exact percentage of income to save is a tough question to answer. Most people follow the 50/30/20 rule where you spend 50% on essentials, 30% on discretionary spending and 20% on savings. If this isn’t possible in your circumstances, then that isn’t a problem. Start with as much as you can save and if that is 5%, so be it. 
  4. Pay attention to recurrent expenses: Expenses that recur every month can add up over time even if the amount you are spending on them per month is small. For instance, you may think a lot before buying a new computer because it is expensive but spending a few hundred on restaurants every now and then does not seem like a big deal although this may add up to the price of two computers over one year. As such, it is important to think twice about all those monthly subscriptions you have and keep only those that are necessary. 
  5. Set target amounts to spend for each category of your budget: This is the hardest thing to do because now that you have kept your savings aside, there isn’t enough money for everything that you want to do. This is where you prioritize and allocate money to what is most important and delay those on low priority for a future date. The budget must prevail. Sticking to it is difficult at first but becomes second nature after a few months.
  6. Focus on what you can control: For most people income is fixed and it is the expenses they have control over. Even among expenses, some can’t be controlled, so make good financial decisions on those expenses that you can control rather than worrying about those that you cannot. 
  7. Pay off debt wisely: If you have any debt, it is important to create a spreadsheet for the loan so that you see how much you can save by paying off a larger amount per month. Often the banks show the overdue amount and the balance only so doing a bit of scenario analysis by increasing the monthly payment can save you a lot of money. Compound interest can add up over the years and sticking to the minimum payment may not be in the best interest of your finances. Money borrowed from family or friends also must be repaid, hence treated with the same respect. Paying off debt on a time builds your credit ratings.
  8. Find a supplementary source of income: If you have spare time then a side hustle can supplement your income. When it comes to side hustles, the sky is the limit these days! Baking, sewing, tutoring, electrical wiring, graphic design, selling products online etc. are all examples of side hustles that can be started with minimal investment. If you feel you don’t have a skill set to support a side hustle, then why not try a part-time job? Supplementing your income contributes to your savings.

After all this talk about savings, the question arises “What are you going to do with the money you save?”. Spending and investing your savings is a topic for another day! In the meantime, open that second account and start saving!