Is this a question you ask yourself often? If so, there could be a reason behind it. It is important to find this reason and tackle it. Salary size should not be a constraint when it comes to saving. It must continue as an automatic process.
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To focus on saving, in this article we have mentioned a few points which are stopping you from doing so:
a. Wrong Investments: Lack of adequate knowledge results in ending up with the wrong choice of investments. Leaving money idle in bank accounts will not serve the purpose. Along with earning, investing is also important. The second step of saving is investing. Acquiring the right knowledge on investments, connecting them with your financial goals and working towards them is the ideal initial step to creating wealth.
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Another advantage of investments is that if money is readily available, you might spend it on whims and fancies. To avoid this, make sure a proportion of your earnings is invested in an instrument that will give you an edge against inflation rates. This can be in debt, equity, real estate and so on.
b. Depreciating Assets: Assets that reduce in value over a period of time are called depreciating assets. Buying depreciating assets hinders saving patterns. These assets will give a lesser amount than the purchase price on a resale. Examples are cars, expensive laptops, mobile phones and so on. Buy them only once you have created enough wealth or when it is mandatory for professional or personal life. At least make sure you don’t avail of loans to buy these products. It will cause you to spend more on a particular product. Instead, buy assets that grow in value over time. Examples: house, gold, stock.
c. Treating Wants as Needs: In order to have a well-defined budget, you must differentiate between your needs and wants. Needs are the basics of existence like shelter, food, clothing; wants, on the other hand, it could include leisure activities, travel, eating out and so on.
This differentiation is a subjective matter. Based on personal choices, this separation has to be done in order to start saving. A simple method to practice this is to follow the basic 50-30-20 rule. Here, 50% of your income must be kept for needs, 30% for wants and 20% must be for saving and investing. This ensures you have savings, no matter what your salary level.
d. Impulse Purchases: Being organized helps you save money. If you do not have a household budget or if you shop without a list, then you are more likely to be a victim of an impulsive purchase. To solve this problem, set financial goals for a specific time period and invest accordingly. Knowing you have to keep aside a sum and run the household with the remaining amounts will automatically reduce your expenses.
e. No Financial Goals: Absence of financial planning and financial goals can leave you empty-handed. Only if you have a goal, you will start saving towards it. Otherwise, the cycle of earning and spending will continue forever. As a result of this, when you require funds for financial goals like retirement, children’s education, wedding or a small function, you will be left cashless. You will end up taking loans or credit cards that can further trap you in debt.
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To avoid this, start setting financial goals even for a small cause. Start planning and saving for all your financial goals. This will inculcate the habit of saving.
f. Latte Factor”: David Bach’s latte factor threw light on this topic in the most influencing manner. Small amounts continuously spent on insignificant stuff can empty your bank account. Impulsive purchasers or people with no financial goals can easily fall into this category. Instead, save small amounts and build a sizeable corpus over time.
The first step is to track your expenses. Keep track of every penny spent. This will help realize your expenses and cut down when necessary. Set an amount aside for such small spends. Otherwise, you are more likely to end up being unmotivated after a while.
g. Loan Dependent: The new generation cannot give up on leading a luxurious lifestyle. Low salaries cannot stop them from leading an extravagant life. Therefore, they depend on loans to finance their lifestyle. Increased peer pressure and the fear of missing out, force them to spend on their wants.
To avoid this, understand the underlying difference between good and bad debt. Good debt helps acquire assets. Bad debt will result in expenses with no returns. The most dangerous among them are credit cards and personal loans. Monitor your financial position before taking them. Make sure you don’t spend more than 50% of your income on repaying any kind of debt.
h. Not Automating Investments: It is quite common that you could get motivated to save after reading an article or a book on financial stability. But, by the time your intension transforms to action, you are more likely to be left without enough money. Why is this so? It is because your investments or savings are not automated.
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Easy access to money can result in overspending or unwanted spending. To overcome this, start automating your investments. Fill out the ECS (electronic clearing scheme) mandate form and submit at your bank. This gives the bank the permission to debit amounts like mutual fund SIP from your account, the moment your salary gets credited. This will result in saving before spending.
i. Following Friends and Family: We live in a society where the motive is to “look” rich rather than being rich. This is what happens when we blindly follow our well-off friends and family. Most people end up doing things, just to show people they are doing well in life.
It could be going on a foreign vacation, buying branded gadgets, fancy cars and much more. This results in spending more than you earn, and will eventually lead to the debt trap. Irrespective of the amount you earn, spending more than you earn will have adverse effects. To avoid this, start saving. Along with earning money, learn to manage money. Start investing in the right way. With the passage of time you will grow rich, just like those you are trying to keep up with.
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