After having considered concepts such as Incomes and Expenses, let’s now talk about something that assures us of a better and more secure future – Savings.

For better understanding, let me divide this post into three sections:

1. Why save?
2. How to save?
3. What to do with your savings?: The Investment process

1.Why Save?

While most of us may agree that saving is a good habit, very few of us look at the explanation to the phenomenon in a logical manner. We save because we must live a long (plus uncertain) life.

All our problems relating to savings and investments would have come to an end, had we been born to live a short life, the duration of which was known to us at birth. But the reality is way different. Not only is an average human expected to live for decades, but our problems are also compounded by uncertainty – uncertainty as to our own health, our family health, and our risk of untimely death. At the grass-root level, it is uncertainty makes a man save. By saving, what we are essentially doing is sacrificing a portion of our current consumption for future consumption, i.e. curbing a little pleasure today to gain much more pleasure tomorrow (called Delayed gratification in psychology).

2.How to save?

‘How to save’ is entirely an individual’s business, which involves no rocket science at all. As you know by now, Savings is simply the difference between Income and Expenses. In other words, it represents that portion of our Income which we ‘did not choose’ to spend in this period.

Putting it simplistically,

Savings = Income – Expenses

Given the equation above, we clearly know that savings directly depend upon two things – Income and Expenses. Therefore, to be able to change the volume of our current saving levels, we must change either Income or Expenses or both.

To put things even more lucidly, I claim that one cannot increase Savings unless she:

• Increases her level of Income OR
• Decreases her level of Expenses OR
• Increases her level of Income AND decreases her level of Expenses

Unfortunately, the truth remains that we cannot bring significant changes to our Income levels, unless over a long period of time. This leaves us with very little choice. All we can do is to endeavor to increase our saving levels through reduction in expenses. And which expense group should we target – discretionary and variable expenses, i.e. those which remain within our control.

3.What to do with the savings?: The Investment Process

This is by far the most important question for any saver. While cutting down expenses and generating savings is only nearly thirty percent of the task, the fruit from the act of saving remains uneaten until the amounts have been invested carefully and meaningfully.

Remember that Savings are ultimately left-over portions of Income. By putting them in saving instruments such as fixed deposits or mutual funds or elsewhere, we are creating Assets that shall be with us in times of need in the future. Not only this, an investment of $10 in a good saving vehicle will come back to us as may be $14 after ten years. (This is because of the power of compounding, which we shall talk about in subsequent posts). This means that saving any amount today gives you benefits in the future, of an amount significantly larger than what you had originally saved. Isn’t that like a lottery? It is – because saving has done no one any harm. It won’t harm you too!

Investing your funds:

The act of putting your savings into carefully-selected financial instruments is referred to as Investing. Similarly, the vehicles you have parked your funds into are called your Investments.

In the next post, we will cover something much more fundamentally important – your risk appetite. Knowledge of this can help you identify the best investment options for yourself, without unnecessary stress.

Thank you for reading.