2. What is Saving?

When you get your salary or pocket money, there are two things you can do with it: Spend or Save. Saving is the part of your salary that you keep aside for fulfilling your future goals. Let’s say Ahemed earn Rs. 200 every month. His expenses are:

  • Grocery: 50
  • Fuel: 50
  • Utility bills: 100

Ahemed’s total expenses are Rs. 200 which is equal to the amount he earns so he is unable to save anything.

Now assume that Ahemed’s monthly income is Rs. 250 and his expenses remain the same. In that case, Ahemed can put aside Rs. 50 every month. This amount is Ahemed’s Savings.

Goals can be as simple as buying a new school bag for your child, paying for your college or buying your first car. However, goal doesn’t necessarily have to be about buying physical products. You goal can simply be about making more money on the amount you have saved.

But what is the guarantee that the money you have saved and kept in your piggybank is enough to buy a car or pay for your college tuition? What to do if the amount you are able to save each month will never be enough to fulfill your goals? Well, you invest!

2.1. How much do I need to Save?

Have you heard about the 50-30-20 golden rule? It’s a simple plan to help you manage your income. According to this rule, one should ideally allocate 50% of the income to his basic needs, 30% to wants and save the remaining 20%. But how can one differentiate between needs and wants? Well, remember the phrase “Need is in the eye of beholder.”

Let’s look at a simple example:

  1. Suppose you earn Rs. 80,000 every month. You are obligated to pay 5% income tax each month. Consequently, your after-tax income would be [80,000 – (5% * 80,000)] or PKR 76,000.
  2. If you want to follow the Golden 50-30-20 rule, you should spend only 50% of the monthly income on your needs. In this case, your needs may include groceries, utility bills and house rent payment. Therefore, you can spend PKR 38,000 on these needs.
  3. You have to allocate 30% of your income or PKR 22,800 to your wants. Suppose you want to buy a new bag this month which costs Rs. 5000 and a mobile phone that costs Rs. 15,000. Therefore, you will spend Rs. 20,000 on wants this month. You have Rs. 2,800 left but don’t want to buy anything else this month.
  4. Finally, you can save 20% of your income or Rs. 15,200 along with Rs. 2,800 for your future consumption.

It is important to understand that the distribution among needs, wants and savings varies with circumstances of each person. That said, it is crucial to strike the balance between spending and saving in order to live a healthy financial life and maintain or enhance your standard of living.

 

Footnotes:

  1. All Your Worth: The Ultimate Lifetime Money Plan Paperback – January 17, 2006; by Elizabeth Warren  (Author), Amelia Warren Tyagi  (Author)