My annual income is Rs 3 lakh. How much of this income should be my savings?
— Ashoka Shenoy, Dakshina Kannada
No. Whatever anyone may tell you, there is no one-fit-for-all savings ratio. Even giving a minimum figure is deceptive. The amount you should save depends on several factors like age, income level, number of financial dependents, financial goals, etc. Hence the ideal savings ratio is different for every individual.
But even after considering all such parameters, just telling you how much to save won't be enough. Simply because there is a difference between how much you should save and how much you can. The amount you can save is determined by income, expenses, debt repayments, investment commitments, etc. The challenge lies in trying to save as much as you should.
We do not know all the details required to work out a definite savings figure for Ashoka Shenoy. But we can help him start with the basics — structuring his cash flow. This will give him a better assessment of his saving capacity. Remember, savings is the foundation of financial planning. So it will be very useful for Shenoy and our readers to do this math.
| MONTHLY (Rs) | ANNUAL (Rs) | |
| Income | 25,000 | 3,00,000 |
| Post-tax income | 21,600 | 2,59,200 |
| Less living expenses | 12,800 | 1,53,600 |
| Emergency fund | 2,000 | 24,000 |
| Investible surplus | 6,800 | 81,600 |
| Savings is 27.2% of total income | ||
| * Figures are illustrative | ||
The first step is to determine your post-tax monthly income. In case of Shenoy, assuming that he does not exhaust his Rs 1 lakh tax saving limit, it should be about Rs 21,600. From this amount, subtract all fixed living expenses, payments and fees, and EMIs. Next, mark out a small sum for your emergency fund (this should be equal to about three-four months salary). Skip this step if you already have enough in the bank. What's left from your pay cheque is the investible surplus.
But is this enough? To find out you must weigh these savings against your future financial needs. First, identify all your financial goals. Some common ones are children's education, buying a house, retirement, etc. Determine how much you need and when. Most people require the help of a financial planner to find out the inflation-adjusted cost of these goals. Once that is known, formulate an investment strategy based on your risk profile.
If you still fall short of meeting your goals, cut back on discretionary expenses to increase savings. For instance, instead of going out for a movie every weekend, make the outing once in a fortnight. Sounds trivial but such small savings always add up.
True, it is easier said than done. All this requires thorough and elaborate planning. But we hope Shenoy now has a better understanding of how to calculate his ideal savings ratio.
We have drawn up a hypothetical monthly cash flow for him (see box). According to this, savings are about 25% of income. While we can't comment whether it is enough, here are some suggestions for investing the amount:
• Equity mutual funds: for long-term goals
• Equity-linked savings schemes: for tax planning
• Fixed deposits: for secure returns
• Real estate: for asset creation
