The great money debate: Savings vs. Earnings
Breaking Down the Numbers
In his book The Psychology of Money, Morgan Housel writes that when it comes to savings, there are only three types of people:
- Ones who save
- One who doesn’t know how to
- Ones who feel there is no need to!
If you fall in the second or third category, this article is for you.
To begin with, there is a need to save (yes, you – the ones in the third category, even you should).
You don’t become rich by how much you earn, but by how much you make:
This is also where Morgan Housel writes about “savings rate”.
What is a savings rate?
To put it simply, the fraction of your income that you can save is your savings rate.
He writes, “The first idea—simple, but easy to overlook—is that building wealth has little to do with your income or investment returns.”
This is so because you may not always be able to control the outcomes of investment. Strategies fail all the time. The market is ever-volatile. The same goes for your earnings! You never know what changes – a boss that doesn’t like you, a recession that dumps a million jobs into the bin.
Returns and earnings can swindle. However, what you do control fully is the ability to save, and how much.
So, if there is one sure-short way of getting wealthy, it is by saving.
Savings rate> Expenditure = More Money
Say, Satish makes INR 60,000 a month, but, he can save INR 30,000. A 50% savings rate!
On the other hand, Mohit makes INR 1,00,000 a month, considerably higher than Satish, but, he can save only INR 15,000. A 15% savings rate!
At the end of the year, Satish would have saved more than Mohit. This proves income doesn’t matter as much as savings do!
How to Save?
There are many ways to invest. There are even more methods to earn. But, can we guarantee the outcome? Often not! How much money you make, income or otherwise, is not in your hands. Hence, how your hands handle the money they do get makes the difference.
Frugality
Since we have already established that we don’t always have control over factors like returns, income, life events, and opportunities – it’s futile to try and control them.
How much do we spend?
Let us assume we all make the same amount of money.
However, some of us can suffice in half of it, while some run the well dry and at the end of the month, they don’t have anything. Despite earning the same, person A is living from one paycheque to another, while person B has saved enough to fund his wedding, for example.
Frugality knows the clear difference between needs and wants. Frugality is the wisdom that lets you decide if something is a good purchase or just a frivolous one.
Point to remember: Do not save what you’ve left after spending, but spend what you’ve got after saving.
And suffice in less. Frugality isn’t so bad when you end up richer.
Why to Save?
Apart from the obvious benefits of saving – it makes you rich, saving gives you control over your own time, energy, and life.
Savings = Mental Peace
Life is unpredictable. A simple turn of events could lead to an emergency.Most emergencies often come with huge bills. In an unpleasant event, the last worry on your mind should be “Can I afford the best possible solution?”.
When you save, you have something to fall back on. By saving, You will essentially be saving yourself some financial stress and helplessness that could arise in the future. Savings allows you to create a larger corpus, which can then serve as your emergency fund.
Savings = Do What You Want
Financial Independence, Retire Early is the chant of every millennial. Savings is the secret mantra! Not so secret now that we have spilled it.
Savings also have an intangible benefit: Freedom and control over your life. Why do we go to work? Why do we spend 8 or more hours a day fuelling another’s vision? So that we may have enough money to fund our own happiness!
But, your salary comes at the cost of time.
Let’s be honest: We would all love a life where we didn’t have to work for most of it. Imagine having enough saved up to retire now and not having to worry about money for the rest of your life. You would have the flexibility to do your things immediately.
Conclusion
Earning doesn’t make you rich. Saving does! We hope you’re not delaying your riches.
Saving allows you to contemplate life on your terms. This means more time to live out your own dreams and more time for your loved ones.
For investments, it is crucial to find the perfect option to ensure that your money is not decaying with time. Bonds and FDs both have their advantages. However, in terms of return, tax efficiency, and flexibility to lock in interest rates, bonds outgrow FDs.
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