The 4 best ways for millennials to start saving in 2021 – Forbes Advisor INDIA
As millennials evolve to become the top earners among Indian households and contribute 70% of their income to total household income, it is crucial to focus on the portion of their income spent on savings. Deloitte report reveals Indian millennials save less than 10% of their income, a figure well below expectations.
The past year has amply demonstrated the importance of savings. For a generation that enjoys doing things “on the go” and embraces the concept of “you only live once”, balancing saving and spending is essential to meeting financial goals.
Here are four main ways you can start saving as a millennial.
1. Formulate a budget plan
The first step towards saving money is to formulate a budget plan. A budget plan serves as a template for tracking spending and filling gaps that lead to unnecessary spending. However, a budget plan doesn’t need to follow a one-size-fits-all approach, because what’s applicable for you doesn’t necessarily apply to someone else.
Therefore, you should formulate your budget with three different parameters in mind: cash flow, liabilities and financial goals. One way to do this is to use intuitive and user-friendly budget apps. These apps can make it easier to track income and expenses and save money in the process.
50/30/20 budget rule
If you’re struggling to budget, the 50/30/20 rule may offer you an easy way out. According to this rule, you must devote 50% of your income to the needs, which involves absolutely essential expenses. These include utility bills, grocery expenses, tuition or college fees, payment of monthly loan payments, among others.
You must direct 30% of your income towards needs, which implies expenses that can be done without. These include costs such as dining out and buying new clothes or gadgets often. You need to save the remaining 20% of your income.
Let’s understand this with an example. For example, if your monthly income is 50,000 INR, you must spend 25,000 INR (50%) to cover your needs. 15,000 INR (30%) should be spent for necessities, while you should save 10,000 INR (20%).
Once you follow this budget rule, it will be easy to save money and slowly soak up the habit.
2. Opt for instruments offering forced savings
This method allows you to save and offers you the possibility of increasing your wealth at the same time thanks to the many financial instruments offered by the stock markets.
Systematic Investment Plan (SIP): SIP in mutual funds helps you invest a fixed amount of money at separate intervals in your choice of funds. If you take a close look, SIP is a type of forced savings. In a SIP, your money accumulates and increases at the same time.
While there is no specific date when you need to process your SIP, it is best to do so immediately after your salary is credited to your account. This will ensure that a portion of your monthly salary is saved and invested instead of necessarily being spent.
Recurring bank deposit (RD): An RD is another financial instrument that results in forced savings. If you open an RD bank, a fixed amount is deducted from your savings account and deposited into the RD account. The RD account earns a nominal interest rate paid at maturity.
SIP and RD mutual funds can be started with a nominal amount with two key differences between them.
- While mutual fund returns are tied to the market, R&D returns are fixed
- In the long run, mutual fund returns are greater than RD.
Advantages of opting for instruments to calculate forced savings
- Soak up a disciplined saving habit
The most obvious advantage of investing in such instruments is that it imbues a habit of saving, necessary for long-term wealth creation.
An emergency happens out of the blue and can derail even the most solid financial plans. These very liquid instruments can help you easily overcome a crisis.
- Build a corpus for short and long term goals
With these instruments, you can build a corpus for short and long term goals such as buying a home, going on vacation, or accumulating funds for retirement, among others.
3. Reduce discretionary spending
Discretionary expenses are non-essential expenses and fall under the category of needs. Even if these expenses stop, your household can continue to operate. However, these expenses are often the cause of the lack of savings among millennials.
Reasons for discretionary spending
There are several reasons for fueling discretionary spending. Some of them are:
- Easy credit availability
Gone are the days when you had to contact traditional lenders for funds involving heavy paperwork. The lending landscape has changed dramatically over the years, and today loans are available instantly through loan apps and loan markets that provide you with an instant flow of cash.
While this is indeed a godsend in extreme situations, loans taken out through these apps and markets can generate a high interest rate, which increases your monthly payments. This can lead to some of the income being spent on paying the installments, resulting in little savings.
While the credit landscape has changed, marketing tactics are not far behind. Many brands offer deep product discounts and lucrative deals to attract customers. While these offers look attractive on the surface, there are several terms and conditions and hidden fees.
Once you get into the habit of using them whenever they catch your eye, the savings take a back seat as you end up spending your income on items that you can do without. This habit only gets worse over time, making it difficult to save.
This is another reason why discretionary spending is increasing. Very often our purchasing decisions are guided by the choices of our friends or relatives. The pressure to copy the lifestyles of our peers leads to unnecessary expenses, offering little opportunity for savings.
Ways to reduce discretionary spending
It is easy to curb discretionary spending. You can easily do this by:
- Put a cap on your credit card
It’s a prudent way to control your spending. Once you’ve capped your credit card, spending will be limited to the capped amount. Even if you want to swipe your card for a reckless purchase, you won’t be able to process due to the cap. It will slowly reduce the instinct to spend on things you don’t need.
Impulse buying often leads to wrong decisions and is a major obstacle in the savings journey. Therefore, before you buy, analyze whether you really need the item or not.
For example, if a new mobile phone hits the market and you plan to buy it, find out if your existing handset can’t do the job for you and doesn’t have the features you might need. If not, it doesn’t make sense to delete your old set for the new one.
- Limit the instinct for instant gratification
Limiting that instinct will help you save a lot in the long run. The craving for instant gratification often leads to an impulse buy, which keeps you from saving.
By the time you can control this urge, you will notice a marked change in your spending habits and the same will automatically increase savings.
4. Make small lifestyle changes
The lifestyle of millennials is very different from that of the previous generation. Millennials look for many little luxuries in life. However, not all luxury goods are bad, some lifestyle adjustments could help rack up some big savings in the long run.
Small adjustments that make a big difference
- Carry your own food instead of eating out
If you haul your food to your workplace at least four days a week and only eat out once or twice, it can help you save decent money. A simple meal out can easily cost between 150-200 INR and even more. Eating out five days a week can easily compensate you from 750 to 1000 INR. It peaks between 3,000 INR and 4,000 INR in a month.
Although these are general numbers, you can easily see how much you can save in a month if you haul food around your workplace. Over the years, this habit will help you save money.
- Use public transportation
You can use public transportation to get around every alternative day to get to your place of work instead of using your private vehicle. This will drastically reduce fuel costs and just like food will save you money in the long run.
You can also opt for shared taxis or shuttles where the fare is evenly distributed. This too can help you save decent money.
- Exercise and eat a healthy diet
Due to our sedentary lifestyle, most of us are prone to various ailments at a young age that require taking medication for a long time. However, regular physical activity and proper nutrition can help reduce the risk of several ailments, thereby lowering the cost of medication.
The COVID-19 pandemic has also highlighted the need for health insurance in his wallet. Even if you are covered by your employer’s group insurance plan, it is advisable to opt for an individual health plan that you can customize according to your needs. With health insurance in place, you don’t have to dip into your savings in the event of hospitalization.
At the end of the line
While the art of saving learns best over time, if you can start thinking about it for the long term, you will automatically start to develop habits that will jumpstart your savings plan.
With the right approach and the right mindset, you can realize significant savings that will help you achieve your life goals and be on the path to financial freedom. Even a small start can make a big difference.