How to save money from salary
Once you get your salary, do you pay everyone else except yourself?
Or do you play it smart and PAY YOURSELF FIRST? Or in other words, do you save money from salary?
Here’s what I mean.
Let’s say Puja’s salary is ₹30,000 a month. She gets her salary on the 30th of every month and does the following once she gets that money:
1st – Amazon shopping
5th – Rent
7th – More Amazon Shopping
9th – Fuel
12th – Lunch with Friends
16th – Groceries
20th – Movie
23rd – Even more amazon shopping
26th – Online courses & Seminars
29th – Fuel
If most people in the world spent money like Puja then Jeff Bezos will become the richest man in the world. Oh, wait.
Every single time she shops on Amazon, she is paying Amazon and the company whose products she’s buying. Every time fills up her vehicle she is paying the petrol company. Similarly, if she buys groceries, she pays the shopkeeper and the other FMCG companies.
And as she keeps spending, she pays herself less and less.
So how do you PAY YOURSELF? The answer is – save money from salary. When you do that, you’re giving your money the chance to grow. The return this money generates is paying you.
How do you save money from salary?
That’s easy. Set aside a portion of money from your salary the moment you get paid. Then, do what you like with the rest. Don’t pay anybody else that money. That amount is YOURS. That is the first lesson in how to save money from salary and a super-important concept.
That’s step 1. But here’s the catch with letting it just sit in your bank account. For one thing, your bank isn’t paying you much for that amount. For another, you will notice that money keeps piling up. Once that money starts to pile up you might be tempted to spend it.
So move to step 2, and where you really start paying yourself. Invest that money. There are many products you can invest in – directly in stocks, in mutual funds, in fixed deposits, in PPF, in NPS. This way, your money keeps growing and compounding exponentially.
Let’s dig deeper to understand how to save money from your salary.
Budgeting is simply knowing where your money is going. Seems simple enough right? Let’s see.
Do YOU know where your money is going? Do you know where you’re spending your money?
If yes, AWESOME!
If not, let’s get started.
- Write down your expenses everyday (in a phone, journal, diary, anything).
- At the end of the month, categorise the expenses. Like these : Necessities (70%), Insurance (20%) & Fun (10%).
- Now you know where your money is going. It’s time to regain control.
- Make your own ideal budget. An ideal budget would look something like this :
- Investments (15%)
- Emergency (5%)
- Necessities : Electricity, Groceries, Phone, Internet, Rent etc (65%)
- Learning (5%)
- Fun (10%)
This would be different for everybody but what’s important is to write it down. Then once you put it into these “buckets”, you clearly differentiate what the money should be used for and rein in unnecessary spending.
A few points here, which will help you save money from salary better:
- You do not have to spend every last rupee in a spending bucket. Carry an unspent amount over to the next month.
- Necessarily have some amount going towards investments/ emergencies. Starting early even with small amounts is better than starting late. If you really are cash-strapped, build an emergency amount first (equal to at least 6 months’ expenses) and then redirect this amount towards investments.
- If you run out of money from one bucket, don’t dip into another bucket for more money unless it is for necessities or emergencies. In that case, borrow money from the learning and fun buckets first. Then dip into the emergency fund you’ve created. Only then dip into the investments bucket. And remember, if you use the emergency money, top it up as soon as you can.
- Don’t stop at just 15%. Go more, if you can! In fact, invest as much as you possibly can. Trust us, you’ll thank yourself when you turn 60!
Become the master of your budget and once you’ve created it, let the budget become the master of you.
As we said, it isn’t enough if you just set aside money. That isn’t SAVING money from salary. You should INVEST that amount instead of keeping it in your savings account or behind your almirah. This way, you PUT YOUR MONEY TO WORK and not to rest. When you do this, your money starts generating even more money. And that generates EVEN MORE money. That’s called compounding. And that’s called paying yourself!
The question is – where should you invest that money? The array of options here is bewildering! But here’s a brief overview of the options best suited for investors like you:
Public provident fund (PPF):
- Among the lowest-risk investments as they are government-backed
- Interest rates are set by the Government, benchmarked to prevailing government bond yields. Interest rates are reset every quarter in theory, but do not always undergo changes.
- Upper limit of Rs 1,50,000 per year
- 15 years Investment lock-in period
- Eligible for tax saving deduction under Section 80C of the Income Tax Act. Interest earned is tax-exempt.
- Useful to have as part of long-term retirement portfolios due to their low risk and tax efficiency
- Simple fixed deposits offered by banks, non-banking financial companies, and some corporates as well.
- Usually locked-in till maturity, but you can break it if necessary
- Lend themselves to those looking for uncomplicated and low risk options. Running recurring deposits can bring in discipline in savings.
- Interest rates change depending on prevailing market rates. Different maturities have different rates of interest.
- As rates can be low in a falling or low interest rate cycle, relying on deposits alone can make it hard to build significant wealth unless you’re able to invest large amounts.
- Can involve slightly higher risks if you go for NBFCs and corporates that are not financially strong.
- Here’s our list of best FDs based on risk & reward
National Pension Scheme (NPS):
- A pension scheme that lets you invest in Equities (E), Corporate Bonds (C), Government Bonds (G) and Alternative Investment Funds (A)
- You can choose the allocation in the different investments or go with the default option that chooses the allocation based on your age
- You need to make regular investments at least once a year, and the scheme matures when you turn 60. If you need to withdraw before this time, there are several conditions attached.
- On maturity, 60% can be withdrawn as a lumpsum and the rest is invested in an annuity plan. The lumpsum withdrawal is tax-exempt.
- Contributions qualify for deductions under Section 80C of the Income Tax Act.
- Read our take on NPS, including allocation, taxation, and more here.
- Here, we’re referring only to Gold ETFs, gild funds, and Sovereign Gold Bonds as these are the most effective in capturing gold price changes and are far more efficient than physical gold.
- Gold goes through long periods of inactivity and short bursts of outperformance. Returns are inversely correlated to stock markets, and therefore are best used as a hedge against equity.
- Here are some gold ETFs that we recommend based on minimal tracking error, reasonable size and low expense ratios (we have excluded SGBs in this list as they may not always have liquidity in the secondary market and have a lock in period of 5 years).
- Read more about gold here.
- Directly investing in stocks on stock exchanges. You are investing in the growth of a company as a shareholder
- Among the best ways to earn inflation-plus returns and build wealth. Quality stocks can rise multi-fold. Needs a long time-frame to deliver and are best used for goals that are at least 7-10 years away.
- Direct stock investing can deliver high returns but comes with risk. It also needs thorough understanding of stocks, their performance, the economy, and more. Also needs time and effort.
- Trading and Demat account required for buying & stocks. Read more about it here and here.
- Here’s a list of stocks that we recommend based on various factors like qualitative and comparative analysis on the business, growth, its potential and industry prospects and more.
- A product that pools in money from investors and invests this in stocks, debt, or gold (or a combination). It is managed by investment professionals.
- The best route you can use to build wealth for any need. Read here for why mutual funds are a great way to save money from salary and the different types of funds.
- Prime Funds is a list of funds across categories that you can invest in. PrimeInvestor’s research team has built this recommended list of funds using quantitative metrics overlaid by qualitative factors, developed inhouse. Each fund in the list is unique in style, allowing you to build a truly diversified portfolio.
If however, you’re still not sure about where to invest, and in what proportion to invest in, don’t worry. We’ve got you covered. Use our Prime Portfolios to see ready-to-use portfolios drawn from our researched MFs, deposits and ETFs products to fit your every aspiration, life goal, time frame, and life situation, that we could think of.
Start to save money from salary early
“I have too much debt and EMIs. I can’t afford to pay myself anything.”
“My necessities take up most of my money! I don’t even have a ‘fun’ budget!”
That’s okay. We understand it’s hard to save money from salary for many, because your expenses are heavy and you just can’t compromise on them. So here’s what you should do.
Pay yourself a small portion.
If you absolutely cannot invest 10% of your salary invest at least 1% or even 2%. What’s more important than investing 10% is having the habit of investing regularly. You can develop this habit by starting with 1% and then gradually increasing it to 10% of your salary. The earlier you start, the better it is even if the actual amount is small. You can always increase it later once you earn more or are able to reduce expenses. You can’t make up for lost time. Compounding works best when it has time.
Here’s an example:
Let’s say you started investing Rs 5,000 per year from when you were 29 until age 60. At an assumed steady return of 8%, you would wind up with Rs 6.67 lakh when you turned 60. But if you had invested the same Rs 5000 a year from when you were 21 and did this for just, say, 10 years and did not add to it at all. The extra number of years that your money compounded will make the difference – your wealth at age 60 would have been Rs 8.5 lakh!
Or here’s another example. Say you started investing Rs 4000 a year from when you were 21 and steadily carried this on till you reached 60. Your wealth would be Rs 11.2 lakh. But say you delayed starting because you were waiting for a bit of good surplus. Even if you invested a bigger amount of Rs 7,000 you would still have a smaller amount at Rs 8.6 lakh. Only if you stepped up investment to Rs 10,000 a year would you be able to compensate for the loss of 10 years’ compounding of a smaller amount.
Therefore, start saving money from salary as early as you can. Every little bit helps!
“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” – Albert Einstein