How much are you saving? And is it enough?

In India, almost everyone saves some amount of their income, with some saving more and some saving less. We have seen savings rates ranging anywhere from 0% to as high as 80%. 

Let's look at some examples: 

• Ramesh, a 28-year-old IT professional earning ₹75,000 per month, saves almost 40% of his income (₹30,000) as he lives with his parents and has minimal expenses. 

• Sunita, a 35-year-old single mother earning ₹60,000 monthly, manages to save only 10% (₹6,000) after paying for rent, her child's education, and daily expenses. 

• The Sharma family, with dual incomes totalling ₹1.8 lakhs monthly, saves about 25% (₹45,000) while maintaining a comfortable lifestyle. 

There is no single rule that determines how much you should save, as individual circumstances vary. As one starts their career, it is advisable to save at least 20% of their monthly income and increase this amount as their income rises over the years.

However, apart from the percentage amount saved, it is equally essential to continually improve your savings potential without compromising your quality of life. 

No, I am not advocating that you live a frugal lifestyle and cut back on your consumption — after all, what's the point of earning money if you can't enjoy it? The goal is to strike a balance between saving and spending. 

That's why I recommend this approach, which can help you save better: 

Expenses equal to Income minus Savings 

Instead of Savings equal to Income minus Expenses 

You might be wondering, what's the difference? In the first option, you first determine how much you want to save and then spend only the amount that is left after accounting for your savings. This makes your savings a top priority, forcing you to save automatically. 

Let's say Kiran earns ₹50,000 per month. Using the traditional approach: 

• Income: ₹50,000 

• Expenses: ₹42,000 (rent, food, transportation, entertainment, etc.) 

• Savings: ₹8,000 (whatever's left) 

With the recommended approach: 

• Income: ₹50,000 

• Targeted Savings: ₹10,000 (20% of income) 

• Available for Expenses: ₹40,000 

• Result: Kiran now saves ₹2,000 more each month and finds ways to reduce expenses slightly without feeling deprived. 

In the second option, you only save the amount that remains after covering all your expenses, which can sometimes result in zero savings. 

A disciplined approach to saving will not only give you greater control over your finances but will also enhance your overall financial well-being. 

How can you improve your savings? 

If you feel you aren't saving enough, creating an income and an expense statement as a first step will give you visibility regarding where your money is being spent. 

After this, it's recommended that you create a budget for your expenses. 

The first step in creating a budget is to identify the money you have coming in, that is, your income. Keep in mind, however, that it's easy to overestimate what you think you can afford if you think of your total salary as what you have available for spending. 

Remember to subtract your employee PF contribution, employer PF contribution and income tax. Ideally, when assessing your monthly saving potential, you should not even consider your annual bonus. 

Next, start by dividing your expenses into two broad spending categories: 

1. Fixed expenses - items such as your house rent/EMI, monthly food expenses (groceries, fruits, and vegetables), electricity bills, phone and internet connection expenses, school fees for your children, etc., which remain the same throughout the year. 

2. Variable expenses - items such as entertainment, travel, and medical expenses, which can fluctuate from month to month. 

For both fixed and variable expenses, you will want to record the amount spent under each category. Record this data for a couple of months to arrive at your average monthly expenditures.

Let's follow Deepak's journey as he tracks his expenses: 

Deepak's Monthly Income: ₹65,000 

Fixed Expenses: 

• Rent: ₹18,000 

• Groceries: ₹8,000 

• Utilities (electricity, water, internet): ₹4,500 

• Phone bill: ₹1,000 

• Loan EMI: ₹6,000 

• Total Fixed: ₹37,500 

Variable Expenses: 

• Eating out: ₹6,000 

• Shopping: ₹4,000 

• Entertainment: ₹3,000 

• Travel: ₹2,500 

• Miscellaneous: ₹4,000 

• Total Variable: ₹19,500 

Total Expenses: ₹57,000

Current Savings: ₹8,000 (12.3% of income) 

After examining his expenses, Deepak identified that he was spending too much on eating out and miscellaneous items. He decided to: 

• Reduce eating out to ₹4,000 (cooking more at home) 

• Cut miscellaneous spending to ₹2,000 

• This freed up ₹4,000, increasing his savings to ₹12,000 (18.5%) 

After you've determined what to set aside for your fixed expenses, you can alter the amount earmarked for variable items. The variable category gives you more room in how much you decide to spend and where, allowing you to prioritise as you deem fit. For example, you might choose to spend less on eating out each month, giving yourself more money to make a family trip outside of India. 

You may be surprised, but just knowing how much you spend under various heads will give you ideas on how to cut expenses if required. 

Remember, the earlier you start saving, the more you will have later in life. 

Assuming the savings grow at an average rate of 12 % p.a. 

To put this in perspective, let's look at Anitha's case: 

Anitha began investing ₹10,000 monthly at the age of 25. By the age of 45, she had accumulated ₹99 lakhs. Her friend Meena started investing ₹20,000 monthly (twice as much) at 35, but by age 45, she had only ₹46 lacs - less than half of Anitha's amount, despite investing the same total sum. This demonstrates the incredible power of starting early. 

Yes, it is possible to create a large amount of wealth over your lifetime. The key is patience and a disciplined approach to investing small amounts of money every month.