How Much Do You Need To Save And Invest?

Many a time it happens that when you tell people to save or invest, they say that this month’s income is already spent, so they will start saving or investing from next month. However, this is something known as mismanagement of cash flow. Due to this, they end up buying things that they do not need at all. This is something known as splurging. It is not that splurging is something you must always avoid, but you need to first focus on saving and investing, and then go for splurging, not the other way round.




Before understanding how much you need to save or invest, it is very important to understand what is meant by saving and investing and why you should consider it at all. Many people think that saving and investing is one and the same, but though these are almost synonymous terms, they have different approach altogether.

Saving is a process through which you keep aside cash and park it in an extremely safe place, say your savings bank account or even in liquid mutual funds. So, in short, saving is something like preserving the capital that can be accessed during times of need.

On the other hand, investing is termed as a process through which you buy an asset, may it be stocks or mutual funds or the like, with the thought that the investment would generate reasonable rate of return for the risk undertaken. So, investing is something like wealth building, where you buy an asset to create wealth.

So, as we saw, saving and investing are both different in their approach. If your needs are short-term, then saving would be appropriate for you. However, if your objective is capital appreciation over the long term to achieve your long term financial goals, then investing would be appropriate for you.

For instance, if you wish to go for a vacation which is due this year, then probably saving would be a wise option; but if you wish to upgrade your car after five years, then investing would be better for you. However, you should first save and then invest. The reason behind the same is the risk factor. Investing comes with risk, but there is no risk involved in saving. So it is better to first secure your short-term needs by saving and then invest the remaining money for the long-term needs.



This is the eighth article of the knowledge series sponsored by Sundaram Asset Management Company, which will cover various topics important for your financial well-being. 

You need to divide your goals between two major parts, needs and wants. Needs are those which are mandatory and which you can neither delay nor avoid, whereas wants are those that can be delayed or even avoided at times. So, the first thing you need to do before gauging how much to save and invest is to list down your goals and segregate those goals between needs and wants. Further, you need to prioritize your needs and wants, so that you would clearly know for what you are saving and/or investing and for what you need to save and/ or invest.

After listing down the goals and segregating them between needs and wants, you need to define their tenures. Then, based on the tenure, you need to ascertain the inflation-adjusted amount that you would require to save/invest at the start for that particular need or want. Now, why do you need to do all this? This is to be done to understand exactly the short-term and long-term needs and/or wants, based on which you would either save or invest. With this, you would also know how much you need to save and/or invest to achieve your financial goals. So now, after knowing all these things, let us find the elephant in the room, i.e. how much you need to save and/or invest? Frankly speaking, there is no thumb rule as to how much to save and/or invest. It would depend on various factors and would be different from person to person.

Generally, it is said that your savings must be around 10 per cent of your income and your investment must be around 10-15 per cent of your income. However, you must not depend solely on this. It is better to first analyze your personal financial situation and then come to a conclusion as to how much you need to save and how much you need to invest. Suppose, all your fixed expenses come to around, say, 90 per cent of your income, then only 10 per cent of the surplus would be left. So in this case, based on your situation, you need to decide whether to save or invest. In case you have enough savings, then go ahead with investing that 10 per cent, but if you fall short in your savings, then it would be better to put that 10 per cent into savings.

If you are currently spending your entire income, then try to save just 1 per cent this month and increase it by 1 per cent every month for the next one year. In a year, you will get into the habit of saving 12 per cent of your income. Remember, reducing your spending is financially more efficient than earning more money. If you are an income tax payer, for every additional rupee you plan to save from your earning , you will need to earn Rs. 1.05 if you come under the least tax bracket, Rs. 1.20 if in the 20 per cent tax bracket and Rs. 1.30 if in the 30 per cent tax bracket. On the other hand, every rupee you don’t spend, you can invest.