How Not To Save

By now you must have decided how to implement the 70-10-10-10 formula or a suitable variation. Just as it is necessary to know what to do with your income, it is equally important to have an idea of what not to do. And one thing that is clear in my mind is not to use Savings Account (also known as Checking Account in some countries) for saving. Savings account does not save you anything. It has the lowest interest rate (some 3 - 4%per annum) and until recently had the most cockeyed interest computation scheme.

The interest was computed on a monthly basis on the lowest balance of that month between the days 11th to the end of the month.

Example:

Date----------Balance
1st Jan ----- Rs. 50,000
7th Jan ----- Rs. 1,000
10th Jan --- Rs. 100,000
15th Jan ---- Rs. 2,000
25th Jan ---- Rs. 500,000

In this case, the monthly interest will be computed on Rs. 2000.

This has thankfully now changed. The interest is now computed on a daily basis on the minimum amount per day. See here.

That said, even this does not make a Savings Account very attractive. Savings account should only be used for parking your money temporarily. As a rule of thumb, I would recommend that at any given time no more than 1.5 months salary be parked in such an account. With intelligent use of credit card (yes, credit cards can be used intelligently) the maximum amount to be parked in a Savings Account can be brought down drastically.