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Hopefully, the first blog in the series, The Basics of Money, has clarified the importance of saving over spending. Save before you spend is the mantra to follow.

This means you have to allocate your monthly saving amount before you start to withdraw anything from your account or make any payments. In this blog we will try to answer two questions:

• How much should you save in a month?
• What if you don’t have enough to save?

The first question is easy to answer, how much you should save can be worked out backwards.

How much should you save?

Firstly, figure out the mandatory expenses. If you live on rent, that’s the first thing. Then there could be electricity bills, phone bills and other non-negotiable monthly bills like spends on grocery, your commute to work and so on. Reduce the sum total of this amount from your income and see what you are left with.

Out of this left over amount you should keep aside something for entertainment expenses and for shopping. It’s possible that in a regular month, you don’t really go through this calculation and as a result end up spending either the entire leftover amount on entertainment and shopping. Or in the worst case, end up overdrawing thanks to your credit card and spending more than you earn in a month on entertainment and going out.

This excess spending has to happen only once for a negative vicious cycle to set in. Here is how it can play out; you overspend on your credit card in one month, it’s easy to get carried away while spending because the bill doesn’t hit your inbox till next month. Come next month, along with your non-negotiable monthly expenses, you have this largish credit card outstanding to clear as well, that already brings down your surplus at the start of the month. Then, thanks to peer pressure you must continue the entertainment spends for this month too. Again, you use your credit card and go overboard. Come next month, once again you are starting out with higher expenses thanks to your credit card bill. This can carry on for months; soon you will find you are able to pay only the minimum amount due on your card, which really means that you are paying even higher charges on your credit card.

I can carry on about how easy it is to get sucked into a swampy spending cycle, but let’s get back to the focus on savings.

Here’s the thing, if you don’t know when to stop spending on entertainment and shopping, then just put a flat 20%-25% of your income aside as savings at the start of the month itself. That put aside, will bring down your spending automatically. You have to make sure you invest that amount immediately, so that it is not accessible to you if you have an itch to spend more.

If your discretionary expenses like entertainment are not high or if you don’t have to spend on the mandatory rent, utilities and all that, then dump in close to 40%-50% of your salary into savings. It’s a high proportion, but ten years later when you look back at this decision, you will know it was the right one to have made.

Expenses will only increase as the years go by; they don’t come down. The more you save in the initial years, the more you will have the liberty to spend in the later years.

What if you don’t have enough to save?

This is also possible when you are starting out your career; the absolute amount of earning per month just isn’t large enough and there is a lot of temptation to spend or even need.

Unfortunately, there is no way to save other than to reduce your spending. Start with reducing the discretionary spends and then make your way to the mandatory expenses. Discretionary spends are what you will shell out on coffee at Starbucks or dinner at the new Japanese restaurant with your friends. These can be controlled with a little bit of will power and determination. If you go out with your friends four times a month, cut back to twice a month and call them over home the other two times.

Even at home, make it a pot luck or bring your own booze gathering so that you cut back on the expenses but not on the fun factor. Slowly you will find you are able to pay off the over drawn credit card bills and in time even able to save some more.

You don’t need to save large amounts to begin with. The beauty is that a small figure of saving every month accumulates and in today’s world of digital investing you can put even small amounts of ₹1,000 or ₹5,000 to work through relevant investments in mutual funds (more on this in later blogs).

If even after you cut back on entertainment you are unable to gather much surplus, then start tweaking with the non-negotiable spending. You will realise that there is some flexibility in that too. For example, dump the imported jars of peanut butter and cream cheese that you love shopping for. Eat the simple home food; not knowing how to cook is no longer a valid excuse in the day and age of YouTube. If you want to take it further, question your living expenses, like the rent you pay and if that can be reduced.

There is always a way to save a little. Start with ₹1000 a month and build it up. Take ₹100 every day and put it in a piggy bank you can’t open, in ten days you will have ₹1,000. There is always something you can save. The challenge is starting.

Summarising…

You should try to save a minimum of 20%-25% of your salary every month. If you feel you don’t have enough left over, start with small amounts like ₹100 or ₹200 every day and collect till you reach a reasonable figure in a month.

Even saving ₹1,000 or ₹5,000 a month is a good start!

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