Young and unmarried: money saving formula for bachelors
A younger unmarried cousin of mine asked me a question a few days back, “brother since I started earning two years back, initially I had a habit of saving almost all my monthly income, but then I thought what is the use of all this saving unless I spend it. So I started spending money on buying stuff like new laptop, LCD TV, bike, but then I realized that I might be spending too much. Is there any formula which can help me to find out what percent of my income should I save and how much to spend? Can you please guide me on financial planning? How should I manage money I earn?”
I told him in a very funny way, “save as much as you can before you get married because after that you would not have a choice between the two.” So when he asked me again, please brother tell me about this seriously. I told him Nitin it is good that you have realized early about planning your finances and money management and also understand that there should be a balance between spending and savings. According to me, there is no definite rule or law which states that you must save X amount from your salary and so on. Personally I feel you should have 3 to 4 months of your monthly salary in your savings account in cash. Once that is there, try to divide your salary into monthly savings and expenses.
Monthly savings can be in the form of mutual fund SIPs or recurring deposits or PPF or other kind of savings where you slowly build your corpus. In times of economic slowdown and recession, you should try to keep your expenses as low as possible and savings as high as possible. And yes, I must admit once you get married, things would be pretty different for sure.
The only reason for me to suggest the above things to my cousin was because he is a young man and the time value of money principle works so well when you save at youth rather than saving later, especially after marriage and having kids.
Some people say youth is for enjoying and spending money, but I admit that you 1 dollar saved during this time will be as strong as your 3 dollars saved during 30s.
Even a difference of 5 years in financial planning can make the graph go completely different.
For example, when I was young, I asked my dad to buy me a video game (the video games which we used to attach to the TV and play - the Nintendo type). But my dad said it is costly and it would hamper your studies. I decided that when I would grow up and earn on my own, I would buy that video game and play it as much as possible. But now that I earn on my own, plan my finances, take responsibility of all household budget paying from electricity bill to home loan installments, paying from kid’s school fees to grocery items at home, managing investments to planning retirement, etc., the craving for video games has gone and I feel I should not waste money on it. Rather I would buy one for my daughter when she will be at least 5 to 6 year old.
By the above example I wanted to show that there is an age for doing things. So at an age when we are young, let us (sometimes) do things that people at that age do (that’s why I will buy it for my daughter at her right age). We are earning not just for surviving but for a living. So let us analyze how much we can save and how much should be our expenditure and plan personal finances and manage our money accordingly.
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