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The power of small savings

The power of small savings

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"Someone's sitting in the shade today because someone planted a tree a long time ago." - Warren Buffett.

Common proverb 'filling the bucket, one drop at a time' demonstrates the power of small but consistent efforts towards achieving bigger things in life. However, this gets a whole new dimension when it comes to savings.

This new dimension is the power of compounding, which magnifies the power of savings over a period of time. Our financial success is not only determined by how much we save, but also by how soon we start to save.

Let's take a look at the following comparison:

Rate of interest 10 per cent 10 per cent 20 per cent
Monthly savings Rs 1,000 Rs 5,454 Rs 2,000
Tenure 30 years 15 years 15 years
Amount accumulated Rs 22.79 lakh Rs 22.79 lakh Rs 22.68 lakh

By postponing your savings, you would have to not only start saving higher amounts but also aim at higher returns to match the corpus you would have built by making smaller savings otherwise.

Personal finance behavioral trap

Do not delay your savings as it will only make things more difficult with lesser time in hand. You can start small, but start today.

BENEFITS OF STARTING SMALL SAVINGS EARLY

Teaches you financial discipline; be an ant

Ants have an innate ability to store for future in smaller portions. To bring the parlance to savings, we can save large sums of money by starting early even if it is small and by staying the course. Ants achieve the impossible through discipline, a trait hard to master, especially in financial matters.

The discipline it takes to stay on course is not easy, however once attained, it becomes a natural part of our routine.

Taking baby steps like saving in small amounts from the initial earning phase ensures that one gets accustomed to this routine. Making these savings at the start of month and designing your monthly budgets with the remaining income is a great way of managing our expenses. It induces the much needed financial discipline by allowing us to save for the future and live in our means in the present.

Becomes a habit of gain, not pain

Make savings a habit, just like eating healthy or going to a gym. We often postpone our savings by assuming we don't enough to save now and with a hope that we will have enough tomorrow. However, in reality, along with the income, our responsibilities of family care also increase over time. Making higher savings during this time is a tough task. An increase in income is associated with higher expenditure rather than increased savings. Planning to save higher amounts during this phase when our expenses are higher increases the burden on our financial life.

Starting to save in smaller amounts from the early days of our earning phase ensures that savings become a habit. By keeping the amount of savings small, you may not feel the burden or need for major sacrifices in your lifestyle.

Winning depends upon time in market and not timing the market

An individual who delays the savings would either need to raise his/her savings rate substantially or make higher returns in order to build the same corpus.

Bigger returns come with higher risks where the downside is high. Timing the market becomes an important aspect when we try to achieve high, unrealistic returns. In history, very few people have successfully been able to time the to get significantly high returns. One should always rely on the time in the market rather than timing the market. Monthly savings should be utilised for systematic investments. One should invest over a period of time at different market levels. By doing so, we not only avoid timing the market but also benefit from the cost averaging in long term.

Conclusion

Another great example to demonstrate the power of small savings is PF contributions. PF contributions are deducted and saved on a monthly basis.

We don't even feel the pinch of this and accumulate a substantial corpus for our retirement. Starting early and saving 10 per cent of income at 10 per cent interest rate is always beneficial than starting late and saving 20 per cent of the same salary aiming a 20 per cent return.

ArthaYantra is an integrated online personal finance company.

Disclaimer: The opinions expressed in this article are the personal opinions of the author. NDTV Profit is not responsible for the accuracy, completeness, suitability, or validity of any information on this article.

Story first published on: September 15, 2013 13:02 (IST)

Tags: financial planning, Savings, Warren Buffett, Stock markets, Investments

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