That little drop

Yesterday I got a call from a sales girl who pushed to sell me a membership card for a chain of hotel. The chain offered a host of discounts. Of course, you have to spend to get those discounts - that being the whole idea. I hesitated. Did not want to spend Rs. 6000 on something I did not need desperately. The girl persisted. "It is only Rs. 16 per day, sir," she said.

She is right. Less than Rs. 16.50 per day for an entire year would be around Rs. 6000.

The funny thing is that the reverse is also true.
If I save Rs. 16 per day I would save Rs 6000 per year.
That's the crux of saving.
You only need to save a little every day.
Just a little.
Every day.

SAving for your child's future

Are you getting married? Congratulations!

Oh! Not yet married? No problemo! You will soon / someday.
Oh! You are already married and have children too? Wonderful.

Have you thought of your child's need 18 years down the line? No?
Then I recommend you do.

I know a few people who start accumulating shares and gold (especially, if they have daughters).

There are other ways also. A really low risk mechanisms (but with the magic of compound interest thrown in) is opening a recurring deposit. Force yourself to save so that in 18-20 years time, when your kid is ready for higher education you have sufficient amount. Saving Rs. 2000 per month for 20 years at 6% interest will fetch you Rs.7,20,000. (Not sure of the prevailing interest rates; I think the maximum period for which you can open a recurring deposit is 5 years. Feedback the matured amount into some other low-risk investment and open yet another recurring deposit till you reach 20 years).

This does not stop you from going for medium risk investments. We will talk about those some day.

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.