:: Newsletter : March 2012 ::

There are 2 friends Mr. X and Mr. Y both in their late 20s. Mr. X has a monthly income of Rs. 60,000, while Mr. Y has a salary of Rs 40,000 per month. However, Mr. X’s job is more stressful and demanding; while Mr. Y has a comfortable job with low stress levels and better work life balance.

Mr. X lives a lavish life. He spends most of his salary; saves inconsistently. On the other hand Mr. Y is very regular in savings. From his monthly income, he saves Rs 15,000 a month in the following investment options.

Pension - Rs 3,000; Child plans - Rs 2,000; Mutual Funds - Rs 4,000; Emergency fund - Rs 1,000; Vacation fund - Rs 1,000; PPF – Rs 2,000; Mediclaim- Rs 2,000

Suppose at the age of 44 years, both have a medical emergency. Due to lack of savings Mr. X would be stumped. However, in case of Mr. Y, his saving patterns, as visible below, would be able to save the day and give him the ability to meet the sudden expense.

Monthly savings	Rs	Rate of interest (Compounded annually)	At the age of 44 years
Pension - Rs 3000	3,000	8%	11,79,008
Child plans – Rs 2000	2,000		5,81741*
Mutual Funds - Rs 4000	4,000	10%	18,98,146
Emergency fund - Rs 1000	1,000	Cash in hand	192,000
Vacation fund – Rs 1000	1,000	invested in savings account	299,520
PPF – Rs 2000	2,000	8%	703783**
Mediclaim- Rs 2000	2,000		Sum assured 2,00000

*At a assumed 6% rate of inflation per annum, 16 years later, Mr. Y would need almost Rs.581,741/- to finance his child’s MBA degree. Assumed post tax returns of 5%.	** PPF is invested for 15 years

One can never predict life. It’s difficult to anticipate bad times. Hence, it is essential to save for such rainy days. One should make it a habit to save, even if it’s a small amount.

Here are some steps which one can follow.

Track expenses: This is the foremost step. You should keep a check on monthly expenses. Unnecessary expenses should be avoided. One way to know how much one spent for a month is by having a monthly budget. This will show where the money is spent and also regulate the cash flows. This done over a period of time will help you identify areas where there is room to cut back on spending and save money. This will free up cash, which can be used to pay up existing debts or help save for the rainy day. Reducing spending, as opposed to earning more money, is the real key to gaining control of finances. Also, you must ensure that some money is set aside to cover monthly expenses for at least three months. These funds should be set aside such that can be readily accessed in case in times of emergency or as a contingency fund.

Pay off debts/ credit card debts: Paying off your debts early is one of the best investments you can make, specially paying off debts which have a high rate of interest. This includes the credit card payments which generally have higher interest costs.

Create discipline: You need to have discipline in the way you spend and control your expenditure. It is the key to save. A consistent plan of saving and investing helps attain one’s goal. With discipline and time one can reach goals.

Importance of saving: Here is a simple example. There are 2 friends, Mr. A and Mr. B. Mr. B saves Rs 500 per month. Mr. A saves nothing. Over the years, here’s what happens.

At a rate of 5%	Monthly amount saved (Rs)	1 Year	5 years	10 years	20 years	30 years
Mr. A	Nil	Nil	Nil	Nil	Nil	Nil
Mr. B	500	6,300	7,657	9,773	15,919	19,931

The discipline of saving regularly has helped Mr. B be richer by Rs 19, 931. Also what you earn is not as important as what you save. If you spend everything you earn in futile pursuits and wasteful expenditure, then there is no point to the amount earned.
Invest: Start the wealth building exercise by investing in low risk investments. Once the base is strong, then increase the risk exposure by investing in higher return investments. Also, do not put all the eggs in the same basket. Your risk tolerance level goes a long way in defining your investment approach. However, do remember your investment objectives before you subscribe to an investment plan.

Low risk	Medium Risk	High Risk
Bank Deposits	Balanced Mutual funds	Equity
PPF, Government securities	AAA bonds	Real estate
Fixed deposits		Commodities

Follow a systematic investment plan: Invest at regular times. By doing a SIP, you can SIP (sleep in peace). This will help you reduce the cost and earn higher returns in the long term.

As seen in the case of Mr. Y, by saving regularly helped him meet the medical emergency with ease. By following these simple steps, you can make your money last longer!