Wealth creation is not about ‘how much you earn’ but rather its all about ‘how much you save and invest’.
Before we talk about savings, lets talk about earnings.
Do you think you are earning enough?
Most people would answer the above question in the negative. It doesn’t matter whether you are earning Rs 5000 or Rs 5 lakhs a month, almost everyone feels the need to earn more. While an individual’s income may be sufficient to meet their current needs, it’s usually not sufficient to meet all of their wants – at least not immediately. That’s why the concept of savings was probably invented so that over a period of time, one could gather enough money to fulfill their wants and increasing needs.
There have been various studies in the field of psychology and economics to understand the correlation between income and happiness – and the findings suggest that the two aren’t related. More money usually does not mean more happiness. Yet, most of us continue on a quest for more money thinking it will enable us to buy our way to happiness and freedom.
The reality however is that with more money, our lives could materially improve for the better in the short term even though the happiness may be short-lived.
There are two ways to earn more money.
Work harder and generate new money via a salary hike or expanding your business.
Invest your existing money so that you can get better returns.
While the first option will happen for sure and it’s completely in your control, however the second option is where the wealth creation lies. Option 1 requires you to be actively involved in day-to-day work and earn. However, option 2 does not require you to be involved regularly. Despite of minimal effort in option 2, the potential of creating wealth is substantially more than option 1.
Let’s first reflect on the difference between savings and investing.
Saving is the process of putting cold, hard cash aside, usually in a savings bank account.
Investing is the process of putting your savings in various investment assets (such as stocks, bonds, real estate, gold, etc.) so that your money grows over time.
While it’s important to save money, it’s even more important to invest your savings. If you don’t invest your savings, their value will only reduce year after year on account of inflation.
Unlike the United States or some of the other developed countries, most of us in India haven’t reached a level of hand-to-mouth existence (it basically means spending whatever you earn every month with almost zero savings).
In India, almost everybody saves some amount of his or her income, with some saving more and some saving less. We have seen savings rates ranging anywhere from 0% to as high as 80%.
There is no one single rule, which determines how much you should be saving, as circumstances differ for individuals. As one starts their careers, one should try and save at least 20% of their monthly income and increase it as their income rises over the years.
However, apart from the percentage amount saved, it is equally important to be constantly on the lookout for improving your savings potential without impacting your quality of life.
No, I am not advocating that you live a very frugal lifestyle and cut back on your consumption – after all, what’s the purpose of earning money if you can’t enjoy it. The idea is to find a right balance between savings and consumption.
That’s why I recommend this approach, which can help you save better:
Expenses = Income – Savings
Instead of Savings = Income – Expenses
You might be wondering, what’s the difference. In the first option, you first determine how much you want to save, and then spend only the amount that is left after accounting for your savings – this makes your savings as a number 1 priority and forces you to automatically save.
In the second option, you only save the amount, which is left after all your expenses, which can sometimes lead to a situation of zero savings.
A disciplined approach to saving will not only gives you greater control over your money but will also improve your financial wellbeing. Always remember that money saved and invested is money earned.