Saving money is one of the most important part of ­financial management for individuals and families. Our spendings have a direct impact on our savings but unfortunately, controlling spendings is a challenge for everyone. Many of us believe that saving money is a methodical, disciplined and largely a left brain process. But it is not entirely true and saving money does need a lot of thinking and creativity.

The real challenge with most of us is to be able to think long term, plan for it and ­finally put enough efforts to achieve it. Therefore, the task of deciding how much to spend directly falls on the head of the spender. Here are a few well known tips on how to save more by controlling spendings...

1. KEEPING A BUDGET

Yes, the same old budgeting technique has gained much more prominence today where credit cards often encourage useless spending. Try budgeting for savings instead of spendings, for a fresh perspective. It will automatically force you to limit budget for spending. Hopefully, you may limit spendthrift activities and impulsive buys as the ­first step.

A creative idea for managing spendings is by maintaining a separate bank account for only spendings. Monthly you may transfer a fixed amount for planned spendings to this account from your income account. One part from our income account will go to savings as planned. This will automatically enforce discipline in managing budget.

2. PROCRASTINATION

Usually, procrastination is found to a useless and typically unproductive habit. But, used at the right place it can be as useful as the methodical thinking, and that right place is the time of spending. When running on the budget above, it’s easy to ­find yourself depleting that ‘spendings account’ before the month ends and then ­finding yourself in the fray with the products you really wanted to buy nowhere to be seen in the order list.

The trick is to procrastinate the use of ‘spendthrift account’ till the ­final days of the month and soon you’ll ­find that your savings are increasing at an increasing rate, and your order-list is full of necessary items you always wanted to buy. Procrastination is a good habit when it comes to spending on things which are not important or urgent.

3. PAY BILLS AUTOMATICALLY

There are wonderful features now a days on your online bank accounts that can help you save a lot of money you end up paying in penalties for late payments (because most of the time the bank account goes empty before the due date). Auto payment of the bills; i.e. postpaid phone bill, electricity and credit card bills, can save you from frequently paying those unnecessary penalties on late payments. Also, it’ll reduce your account balance in time, allowing you to spend only as much as you should and create another barrier to spending.

4. MANAGE CREDIT CARDS

Now we come to the hard part, credit cards you so dearly love and use, not just to buy the favorite weekend dinner or movie tickets, give wings to your spending, and if spending gets the wings they are sooner or later bound to go out of control. Therefore, you are left with two options with credit cards:

A You can pull your socks up and start managing your cards meticulously, or

B You can go ahead and switch to Debit cards. (yes, it means surrendering your credit card)

So, which one should you follow? Depends completely on your personality. If you feel that you are one of those people who love discipline, planning and are patient with money, you can easily manage your credit. On the other hand, if you like to call yourself creative, love living in the moment and being spontaneous, credit cards are perhaps not a useful choice for you (though, there can be exceptions).

This step is important, because your credit card can easily make or break your credit score. Credit cards are best and perhaps the easiest way to build a good credit score, all you need to do is take care of the following:

• Have a total credit limit no exceeding your annual income on all your credit cards combined,

• Use only up to 70 - 75% of the total credit limit in any billing period, Ensure that you are always able to pay in time, and

• Ensure the amount spend is always paid in full in the same billing period.

This may sound tough for the right brainers though, and if it does you may follow the tricks given below and still manage to keep a credit card.

• Spend only as much you can repay at the end of the billing period.

• Tally the credit card transactions and your bank balance regularly. Check past records to see how much you can actually spend through credit card.

• To save miscalculations switch to bill payments for phone and electricity through credit card.

5. LET SOMEONE ELSE DECIDE

This may sound strange but, it is a very useful and stress-free method of making your spending decision. There is one limitation however, you cannot bank on the stranger for each and every small expenditure, and neither would you like the control the stranger may exercise on your expenses. The way to solicit the stranger’s help in controlling your expenses is to get a comprehensive plan and let the stranger tell you how much you can spend in each of the months. That stranger, will usually be your ­financial planner or wealth manager, and will provide you a comprehensive roadmap for not just future but also the present. Knowing what is important and what is not, setting your priorities based on factual data and numbers and not on feelings and impulses will certainly allow you to achieve the self-discipline needed to control the spending.

OTHER INTERESTING METHODS

If somehow you find accepting and applying any of the methods above, yet you still want to be able to control your spending there are more interesting and rejuvenating ways to do that:

A] Spend time prioritizing & planning: A weekend exercise each month or every two months will take you long way towards family bonding and spending your money in far more useful and satisfactory manner.

B] Think Long Term: Long term success requires short term sacrifice and the same is true for money as well. If you have bigger long term goals spending control in the short term is very important.

C] Use SIP Mode: SIP mode of investment, or Systematic Investment Plans can be useful in diverting your money towards savings each month before you can think of spending it. Plus, you have added advantage of performance if you are investing in Equity Mutual Funds.

D] Use Your Recording Skills: No need to be surprised here, recording skills mean recording transactions not the video recording skills. All you need is a notepad on your smart phone or a small notebook and a pen at the end of the day and less than 5 minutes of time to record every expenditure you incurred throughout the day. Best way is to use a spreadsheet on your cell phone or laptop, where you can enter the bank balance at the top (in negative) and then record the spending every day with a total being displayed at the bottom. This, will keep telling you about how close you are to the limit you have set for your expenses. Additionally, if you want to get creative, spreadsheets can be wonderful in reflecting your income-expense status. You may add pie charts (see ­gure: “Spending Chart”) and actually use the data to tally with your bank statement, giving you a comprehensive picture of where your money goes and where you can control its ow.

E] Make a List: Prepare a ‘Go Get It’ list before you go out to shop. It is an old but powerful tool to get hold of your purse each time you get attracted to a new arrival at the superstore, or the new advertisement for the same old non-useful product you already own. With these many weapons at your disposal, it shall be easy for you to conquer the spending territory. Additionally, you can try finding your very own creative ways to control your spending and credit yourself with successfully defending your money later.

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"The biggest risk is not taking any risk.. In a world that's changing really quickly, the only strategy that is guaranteed to fail is not taking risks." - Mark Zuckerberg, Facebook

In order to grow, we need to take risks, in businesses and in our careers, we need to walk up the hill to see what's lying ahead, we need to explore ourselves to find our true strength. Before we take the risk of shifting from Content Department to Sales Department of our organization, how do we come to know what are we really good at. Risk and return go hand in hand, you want to become rich, you must take the necessary risks. Among the two major financial asset classes, Equity and Debt, Equity is generally associated with risk and Debt with safe and steady returns. Indian investors have been playing too safe with their investments, our investments are dominated by Debt, our portfolios are largely concentrated with FD's, PPF, RD's, traditional insurance policies (since we get a fixed amount on maturity), Post Office Schemes, etc. Even young investors in the early stages of their careers aren't assuming any risk.

As highlighted earlier, there is a direct correlation between Risk and Return. The problem with being too conservative is it leads to sub optimal returns over the long term, which is not a sustainable approach for realizing long term goals.

Many investors religiously invest in PPF for their Retirement. Let's understand the Risk Return paradox through an example in this direction. Let's say an investor (aged 35) invests Rs 10,000 every month in PPF for his Retirement goal. This guy would get Rs 91.48 Lacs when he retires (when he'll be 60). Had he invested in a product with a better return potential like an Equity Mutual Fund, if he would have been SIPing this Rs 10,000 in a diversified equity fund, he would have got Rs 1.7 Crores when he retires. And Rs. 1.7 Crores looks way more reasonable to fund ones post retirement life, (which may stretch upto 30 years) as compared to Rs 91.48 Lacs. An extra 4% return could have funded another decade of this investor's retirement.

On the other extreme end, there are some investors who understand the paradox and take supernormal risks to get extraordinary returns. There are investors who do commodity, future trading, intra-day trading, etc., but these are the ones who lose the most money.

So, the question that arises here is, how much risk should you take?

The risk you should take is dependent upon a number of factors, viz.

• Your financial position: income, expenses, assets, liabilities;
• Family responsibilities;
• Your age;
• The time you have in hand for your goal to arrive, etc.

However, the risk quotient is always subjective, it varies from case to case. The Risk should be in conjunction with the returns you need. The real risk arises when the value of your investment is less than the value of your goal, what happens in between doesn't matter in the end.

The Golden Rule is Young Investors should take more Risk and the Old Ones should take less risk. But what if the retirement FD of the old investor is not enough to last him for the next 20 or 30 years. Will it be prudent for the investor to continue invested in the 8% FD providing safe and stable returns? Probably No. He needs better returns from his retirement corpus, to provide for his expenses till he's alive. For this, he must expose his corpus to some risk, to earn the return he requires to survive.

The bottomline is, if there is a difference between your risk appetite and the risk you require, you need to bridge the gap. Sometimes, it is ideal to take risk even at 60. We must understand that in order to create wealth/have the required money to actualize our dreams, we must take the necessary risk. Great things never come from being in your Comfort zone, because in the end, we only regret the chances we didn't take earlier.

So, are you taking enough risk?

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Today mutual fund SIPs have become very popular. With growing financial awareness, more and more persons are today investing in equity markets through the mutual fund SIP route. To those who do not know, SIP stands for Systematic Investment Plan which helps you to invest a fixed amount at periodic intervals (daily, monthly, quarterly) over a period of time in your chosen mutual fund scheme/fund.

However, it has been found that while investors open to starting SIPs, it becomes slightly difficult when it comes to increasing the SIP amount by cutting down on your expenses. That is something people are not really doing today. Another challenge after starting the SIP is to repeatedly increase the SIP amount. People tend to not increase this amount for many years altogether. We have to realise that due to inflation, the real value of money decreasing. This effectively means that you are saving less tomorrow than today with a stagnant SIP value where it should be increasing with your income levels. By not reviewing and increasing your SIP from time to time and investing below potential, you are loosing heavily on the wealth creation opportunity. We will see this lost opportunity later in the article.

As a solution to the problem of stagnant SIP amount is Top-up SIP. SIP Top-up is a facility wherein an investor who has enrolled for SIP, has an option to increase the amount of the SIP Instalment by a fixed amount at pre-defined intervals. Thus, this facility enhances the flexibility of the investor to invest higher amounts during the tenure of the SIP. The Top-Up SIP can be registered at the time of starting a SIP itself. Thus, you may choose to increase the SIP periodically, say half-yearly or yearly frequency, by any amount. This will automatically increase your SIP amount at the set frequency without you having to do anything further. The Top-up is like your commitment today for increased savings tomorrow which we as investors would be more comfortable promising today.

Let us now look at an example for the difference that SIP Top-Up makes in the wealth creation journey of an investor. Please note that this example is for illustration purpose only.

Scenario [A]

In this scenario, a normal SIP is taken with any Top-up facility. As we can see, the projected wealth is 3.08 Crores.

Scenario [B]

In this scenario, the investor increases his SIP amount by 10% every year over the previous year amount. We can see, the total amount saved is nearly Rs.8 crores, which is higher than original SIP corpus by over Rs.4.9 crores. The incremental benefit due to Top-up is in fact higher than the base SIP investment itself.

Why Top-up?

The reasons for having a SIP Top-up facility on your base SIP should be now very clear to everyone. Here are the key pointers to summarise the same.....

• Increase your savings along with increase in the income levels
• Sustain/increase your 'real value' savings due to inflation
• Reduce unnecessary spendings due to income raise due to committed increase in savings
• Achieve challenging /big financial goals and/or reach financial goals faster
• Operationally easy and simple

Conclusion:

We would highly recommend that you choose the SIP Top-up facility while starting any new SIP. If you already have an existing SIP, you are not too late and you can speak with your financial advisor to guide you in availing this facility.

Indian investors are typically well diversified when it comes to asset classes. A normal person can be found willing to invest in gold or fixed income or small saving instruments for his/her financial needs. He/she can now also be found trying his luck investing in direct equities. So can we say that the investor is doing the right thing here by investing directly into such different asset classes?

The answer is No. Traditional investment avenues are sub-optimal choices plagued by many drawbacks and challenges. Let us explore these traditional ways to hold assets more closely:

Gold: The traditional method is holding it in form of physical gold. The physical gold is typically in form of jewellery. Another way of holding it is through Gold bonds although it is still not a popular way to hold gold. Here are the drawbacks of holding gold in traditional /sub-optimal ways…

• The first drawback of holding gold is first of purity. We are really not sure if we are getting the right quality of gold we are buying and often have to rely on the brand and/or the certification given/quoted by the seller.
• Next drawback is the cost of making or making charges charged on jewellery. This cost is like a sunk cost and would not be realised when gold is resold back.
• Physical gold has the drawback of liquidity, both at the time of buying and selling. High initial purchase cost makes it difficult for everyone to buy gold. Selling also is not easy, especially with Gold bonds where there is a five year lock-in period.
• The last and the most important drawback is of security with the risk of theft, loss always looming over you.

Debt: Indian investors have a great love for holding debt or fixed income products in their portfolio. This is typically in the form of bank fixed deposits or bonds or the popular small saving schemes of the government. Here are the general drawbacks of holding such assets, the traditional way...

• The traditional debt products are not very liquid. Bank fixed deposits are locked away for at least few years of your choice. Small saving schemes of government, like PPF, KVP, NSC, etc, have high maturity years.
• The next drawback is of penalty levied when a pre-mature withdrawal or closure is made. This penalty frankly does not make any sense and is like punishing the investor for any sudden requirement which cropped up.
• The most important drawback is related to inefficient taxation, especially in the case of fixed deposits. Returns from bank fixed deposits are interest income and as such have to be added to your normal income every year and taxed at your income slab – which normally would be 30%. Banks also deduct TDS on interest income from fixed deposits.

Equity: With rising markets and growing awareness, investors are attracted towards investing in equities. Most investors typically are lured towards investing in direct equities through share brokers. Investing equities though is full of challenges and not an easy thing to do as a retail investor. Here are the drawbacks of directly investing in equities...

• Stock selection is not easy. It requires lots of expertise and knowledge about the company and the industry. To develop this expertise and knowledge, one may need to put in years of time and effort.
• Monitoring your stocks and other opportunities in the market requires a lot of time and effort. It requires dedicated effort on your part.
• Direct equity investing is highly risky as your portfolio would be concentrated in few stocks.
• The last drawback is in form of emotional challenge you would face on a daily basis while making the decision to hold, sell or buy with the increased volatility. This would add to your stress levels too.

As we clearly understand now, traditional ways of investing in some our popular asset classes is really not appealing and has a lot of drawbacks. The real question now is - what would is the ideal /right way to invest?

While there is no right way for everyone, surely there is one option that removes the drawbacks as discussed above. And the answer is Mutual Funds.

How can Mutual Funds remove the drawbacks?

Mutual funds can be understood as an investment vehicle which pools money from many investors and invests into asset classes of choice. A fund manager and his team then manage the assets professionally as per the fund /scheme objectives. It is important to note that a mutual fund is not an asset class in itself as the underlying can be any asset class or product like gold, debt or equity. As an investment vehicle, we can see mutual funds offering many advantages or benefits to its' investors. These are...

• Professional Management: There underlying investments of a mutual fund is managed by a qualified, experienced and skilled professional fund manager and team with lots of resources and information at their disposal.
• Diversification: The investments in a mutual fund is spread across different issuers (for debt) and stocks (for equity). This reduces risk as the relative weight of any bad investment is small.
• No buying limits: One can effectively start making investment in any asset class with as low as Rs.500. There are no upper limits though.
• High liquidity: Most schemes (open-ended) are available to buy or sell on a daily basis to its' investors. You can effectively sell anything and receive money in couple of days.
• No Lock-in: Mutual funds typically do not have any lock-in periods and you can invest for any duration and withdraw at any time.
• Choices: Mutual funds offer a huge choice of products and underlying asset classes. You can choose your scheme as per your risk appetite and investment horizon. A person can choose to invest in say liquid debt funds for a few days or equity funds for long term horizon.
• Tax efficient: Compared to fixed deposits, debt funds are much more tax efficient. First, there is no interest income but capital gains. If you hold the investment for least three years, you will benefit from long term capital gains of 20% with indexation benefit. There is no TDS as well.

Having known the advantages of mutual funds over traditional investment routes, you should at least explore mutual funds further. Please note that mutuals are not risk-free and are subject to market volatility. On the other hand, they also have the potential to add deliver higher returns. We would recommend that you consult a mutual fund distributor or advisor for proper guidance for your investments.