Savings is a crucial aspect of financial planning. It is the first step towards a healthy financial future. And while there are several steps you can undertake to expedite your savings, it can be tricky, especially with burdening EMIs. Balancing loan payments and savings can be precarious.
So, here's a simple guide to help you get started.
Learn to live on less than you earn
Not to be confused with pinching pennies, you can easily live on less than you earn by prioritising your expenses.
Focus on your bare necessities first. List all your regular expenses (even if they are periodic) and see if you can make any concessions. A good thumb rule is to keep your monthly household expenditure under 50% of your monthly income.
As challenging as it sounds, there are many ways to cut down on expenses. Start with developing a prudent budget. It will alert you to the overspending habits you might not know. A survey revealed that unknowingly, most people end up overspending on food and entertainment.
Make it harder to spend:
Hide those credit cards. Cash payments are known to be big demotivators of spending.
Avoid saving your payment information on shopping websites as it facilitates smooth transactions.
The key is to curb all unnecessary expenses at the earliest. Learn to identify the difference between your needs and your wants. Before you make a purchase, ask yourself, do I really need this?
You will never be able to repay your debt or even start to save if new purchases keep adding up.
Start with saving for unforeseen events and emergencies
Once you have started saving, ensure that you maintain an adequate emergency fund. This money kept aside to meet any unforeseen expenses like a house repair or if you suddenly find yourself without a source of income. A good thumb rule is to keep 6-9 months of household expenditure aside in an accessible and safe investment instrument.
Maintaining an adequate emergency fund is of utmost importance. As without any savings, focusing solely on repaying loans can backfire when unexpected needs or costs come up. It can exacerbate your situation, forcing you to borrow again and making loans a revolving door.
Start by taking small steps towards saving for an emergency fund. Strip down your household expenditure to a bare minimum and put those savings towards building an adequate emergency fund. Continue this for a few months until you have created a sufficient nest egg.
Some people feel uneasy and tied down without a certain level of savings in their name. A sufficient amount of savings might provide peace of mind. And thus, saving and paying down loans, simultaneously, might be the ideal approach for them.
When deciding whether to pay off tax-deductible loans versus saving, don’t worry about losing a tax deduction if you pay off the loan. The tax-savings is probably worth a lot less than the annual interest you would pay on the loan.
Look for an alternate source of income
Even after minimizing all your expenses, you find yourself perpetually struggling and barely making ends meet, look for an alternate source of income. In this day and age with several new online opportunities, making that extra bit of cash from the comfort of your home is not that tough.
A burgeoning debt and no savings can cause a lot more damage than you realise. So if controlling your expenses does not work, earning more might help.
Once you identify the financial goals that motivate you, it may not seem like much of a sacrifice. Thinking about the future can be a great way to motivate yourself to stick to a plan for loan repayment and saving.
The faster you pay off your balances, the sooner you can enjoy other pleasures in life without the hassle of managing debt.
Focus on increasing your savings by cutting your costs. Try to make it a lifestyle choice, so you don’t slip back into old habits.
Surely it will take you time to free up money to put toward a debt reduction plan while hopefully still being able to contribute to an emergency fund. But if you work hard, you can get your finances under control.
Once you have repaid all your debt and gained full control over your monthly incomes, start saving and develop a disciplined investing schedule.