Savings Smart - Let your savings grow on themselves

Wealth management is my pastime since childhood. I use numerous techniques to handle my money and always try to learn more. My basic principles behind increasing my wealth include:
1. Earn more
2. Spend less
3. Spend smart
4. Manage savings judiciously

Earn more: Increase your earnings. Improve your skills so that you get good salary. Always be ready to learn new things, as they will give you edge over others and will help you earn more.

Spend less: Spend less than what you earn. If you spend all that you earn, your wealth will never increase.

Spend smart: Spend smart and will have more blogs on same here subsequently.

Manage savings judiciously: Yes I am earning and spending less then what I earn! Now why do I need that! Simply for same reason for which you want to save in the first place: “Future Security and increasing your wealth”. Let’s take a meager example; there is a man, ABC, who earns Rs 10000 per month. He follows principle# 2 and spends Rs 8000 only. So he saves, Rs 2000 monthly. He keeps his savings with him and not in bank and he is doing this from last 12 months.

So total he have (10000 – 8000) * 12 = 24000.

He wants to buys a bike whose cost is Rs 50000 and increases 2% annually. So if in current year its cost is Rs 50000, next year it will be:
50000 + 50000 * .02 = 50000 + 1000 = 51000

To buy that bike, ABC needs to save for 27 months approximately.

But the main thing to notice here is cost of bike is going up every year, but his savings are not growing on its own. This is called “Inflation into Picture”. And what it means is once you will stop earning, cost of living will increase day by day, but your savings will only be depleting. So, while you are young and can take some risks, learn the art of ‘Smart Savings’. One of the naiveté and least time consuming approach may explain it better.

Now consider the second scenario, ABC saves his money in bank and for simple calculation sake, let’s assume that bank gives 4% return after every 12 months. So how much money will this gentleman have after 1 year, i.e. if he started in Jan 2007, how much will he have in Jan 2008:

Month	Principal	Interest	Total
Jan	2000	2000*4*12/(100*12) = 80	2080
Feb	2000	2000*4*11/(100*12) = 73	2073
Mar	2000	2000*4*10/(100*12) = 66	2066
Apr	2000	2000*4*09/(100*12) = 60	2060
May	2000	2000*4*08/(100*12) = 53	2053
Jun	2000	2000*4*07/(100*12) = 46	2046
Jul	2000	2000*4*06/(100*12) = 40	2040
Aug	2000	2000*4*05/(100*12) = 33	2033
Sep	2000	2000*4*04/(100*12) = 26	2026
Oct	2000	2000*4*03/(100*12) = 20	2020
Nov	2000	2000*4*02/(100*12) = 13	2013
Dec	2000	2000*4*01/(100*12) = 06	2006

At the end of 12 months, now he has Rs. 24516 instead of Rs 24000. And his dream is not Rs 51000, and he needs Rs (51000 – 24516) = Rs. 26484.

Now in the second year, he starts with 24516 + 2000 = 26516, and it goes like this:

Month	Principal	Interest	Total
Jan	26516	26516*4*12/(100*12) = 1	27576
Feb	2000	2000*4*11/(100*12) = 73	2073
Mar	2000	2000*4*10/(100*12) = 66	2066
Apr	2000	2000*4*09/(100*12) = 60	2060
May	2000	2000*4*08/(100*12) = 53	2053
Jun	2000	2000*4*07/(100*12) = 46	2046
Jul	2000	2000*4*06/(100*12) = 40	2040
Aug	2000	2000*4*05/(100*12) = 33	2033
Sep	2000	2000*4*04/(100*12) = 26	2026
Oct	2000	2000*4*03/(100*12) = 20	2020
Nov	2000	2000*4*02/(100*12) = 13	2013
Dec	2000	2000*4*01/(100*12) = 06	2006

At the end of second year, he has now Rs. 50012 instead of Rs 48000. And bike is Rs 52020. So one more month saving and he achieved his target in 25 months, instead of 27.

So, got the point, mediocre 4% annual returns on his savings helped ABC to achieve his goal one month faster. That is why one needs to manage his savings judiciously.

Inflation and interest figures used here might be fictitious but not the facts. There are many tools for investments with various terms and conditions and it’s too late for today to discuss them. Will write about my techniques in some other blog, for now think about ‘Smart Savings’.