In any financial well-being session, the part which gets the audience visibly excited is when the talk on investing begins. This is not surprising because we all want to create wealth, be richer, and have more money to spend. While it’s true that identifying the right type of investment goes a long way in your wealth creation journey, the bigger and more relevant piece of the puzzle is a much simpler step.
Let’s think about the typical cycle of money that we follow. We earn, we spend and if there is anything left over we save. True wealth creation however, can happen only when we change this cycle. Change it how? You have to prioritise saving. Switch the place occupied by saving and spending: you earn, you save and you spend.
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This is important because if you always rely on savings as a leftover from what you have spent, you may find that your savings are not enough for what you need in future; plans to retire or even emergencies that come without any warning. Your savings are your bridge between current financial wellbeing and your future financial security. They not only become a cushion in case of emergencies today, but also, if invested well they provide for luxuries in future.
If your savings are always leftovers, you can never be sure whether they are enough to satiate hunger today or in the future. A better approach is to keep your fridge stocked with ingredients or ‘savings’ you can use any time; whether you cook up a humble meal or a feast with those ingredients, is secondary.
The importance of focusing on saving more
We know that there is an element of uncertainty in life. Term life insurance and health insurance, are solutions to cover financial outcomes of certain types of emergencies that may occur today. However, there are other emergencies which sometimes can only be covered with your savings.
Job loss, for example, or a lowering of your income due to a disability or funding your relatives financial crisis or COVID like circumstances and so on. While we can plan a lot of saving around known goals, it’s the unforeseen emergencies that can be hard to handle.
Unless you have a pile of savings to cater to your current emergency, you will end up dipping into the investments for your future financial security and in turn lower your wealth.
Secondly, your future financial security needs you to save today thanks to inflation eating away the value of your money. Maximising your savings today and then choosing an appropriate investment allows you the luxury in future to decide how best you can utilise your time. Over spending today or prioritising spending over saving will limit your ability to choose your life’s outcomes in the future when active income slows down or when you come to a point where you would like to have more control over how you spend your time everyday.
How can you maximise saving?
Once you conscientiously place saving ahead of spending you open up the door to creating future wealth. It’s important to understand that how you save is really a matter of habit. If you want to improve the rate at which you save, you must make a habit of lowering the rate at which you spend. This is especially important when it comes to saving for your future.
You may focus on increasing your income or increasing your return on investment meant for the future, however, both these aspects have parts which are external to our control and hence, outcomes can be uncertain. How much you save is up to you.
Moreover, income increase, especially for the salaried employee, is likely to happen only up to a certain point in time. After this, you have to rely on your passive income or income created through assets to fund your lifestyle.
Firstly, try not to make a habit of a lifestyle which can become expensive to fund in the future. Secondly, focus on saving early and enough, so that the pile can grow suitably to fund your future.
If you are struggling to begin your saving journey, pick or create a strategy that works for you and one you can follow sustainably. Undoubtedly, you must save before you spend and cut back on wants, beyond that focus on specific ways to increase saving. For example, you could keep a target amount you need to save every month; the 50-30-20 rule which highlights saving 20% a month is a good place to start.
You could start tracking your expenses, this will highlight the unnecessary spends and allow you the vision to cut back where you know the spending isn’t needed or adding any value to your life. Tracking expenses also helps you to identify those spends which ultimately are meaningless to you. It also allows you to see if you are spending on things that really matter and bridge that gap, if it is there. Budgeting your spends and delaying gratification are some other habit forming ways to increase savings.
The truth is that wealth can be measured in money and in free time. When you focus on maximising your saving effort early in life, you give yourself the ability to maximise future wealth in terms of money and as measured by the free time you have bought for yourself.
Lisa Pallavi Barbora is a financial coach and founder of moneypuzzle.in
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Published: 14 May 2024, 10:07 AM IST