Sep 15, 2008

10 Reasons Why You Need a Savings Plan

If you look after the pennies, the dollars will look after themselves.

How much do you save? Are you saving enough? Do you know how much you need to save? Do you ‘pay yourself first’ and spend later or vice versa? Do you have a savings plan in place or just save in an ad-hoc manner? I think answer to above questions is probably either no or don’t know.

With one of the highest savings rate in the world, India is known as the nation of savers. But still a lot many of us–-especially the urban elite--are unable to save enough for the future and go through life consistently worried about our financial security, unprepared for what the future may hold. Anyone who has lived paycheck to paycheck understands the frustration and concern of not being able to save.

Saving is simply setting aside money to spend later by keeping it from going into someone else’s pocket. It is a vital task which is extremely important to our family’s financial future. However, after insurance, savings is second most important, but neglected, area in personal finance. Its role in financial success is either ignored or downplayed. If you don’t have a reason to save, you won’t.

Here are 10 good reasons why you need to plan for savings

1. Savings comes before investing
First you save, and then you invest. Therefore, savings planning comes before investment planning. It is an important component of financial planning along with risk management, investment planning, tax planning, estate planning, and retirement planning.

2. Achieve financial freedom
Financial freedom does not come from having a large income; instead, it comes from taking a proactive approach and managing the money that we earn. Having a proper savings plan gives you flexibility to pursue your life dreams.

3. Balance current & future spending
A sensible financial lifestyle isn’t about hoarding all money for that rainy day. Money is for living. It’s a tool that we use to better our lives; however, it needs to be used wisely. It’s a careful balancing act between living well today and living even better tomorrow. Oscar Wilde said,

“When you are young you think money is the most important thing in life. When you are old, you know it is.”

By having a savings plan, you can optimize your savings i.e., neither under-save (and sacrifice future living standards) nor over-save (and sacrifice present for the future).

4. Penny saved is more than the penny earned
Benjamin Franklin said, “A penny saved is a penny earned.” In reality, it’s much more than that, taking into account the fact that earned income is subject to tax while savings are not. At a marginal tax rate of 33.99 per cent, Rs.100 saved is equivalent to earning Rs. 151.49 (that is, roughly one and a half times the amount saved).

5. Become aware about the importance of money in your life
Awareness is the major factor in prudent money management.

“An unexamined life may or may not be worth living-but it’s almost always more costly than the examined one”,

is how Lee Eisenberg put it in his book The Number: A Completely Different Way to Think About the Rest of Your Life.

6. Enjoy comfortable retirement
Savings money is not a choice; it’s a necessity. Unlike the US, in India there is no social security. You have to take care of your own retirement and retirement costs money. Furthermore, inflation (which erodes the value of money), increase in average life expectancy (which means we are living longer), gradual shift from defined benefit to defined contribution plan and increase in health care costs has made planning for retirement all the more important. There are two options: either we save more by starting early or work longer.

7. Provide financial security
Occasionally, life keeps on throwing unpleasant surprises. Sudden job loss, prolonged illness or disability, unexpected medical emergency or natural disaster can happen to anyone. These financial emergencies can ruin the unprepared.

You can neither predict them nor prevent them but, fortunately, making provision for contingencies helps you in tiding over unforeseen crises. It provides emergency cushion and gives you piece of mind. Without ‘saving for the rainy day’, you’re living life on the edge.

8. Plan for life major events
During our lifetimes, we may each experience many important events such as children’s education and marriage, house purchase and retirement. We need to plan for these anticipated life events.

9. Plan for large purchases
The list of big ticket purchases includes (among others) new car, home improvements, new furniture, household appliances, jewelry and vacations.

10. Conserve the resources of planet earth
Last but not least, there is direct and positive correlation between saving money and conserving the finite resources of the planet earth. By consuming less, avoiding waste and savings more, you not only secure your financial future but also make contribution towards sustainable living. For more details, please read: Savings-A step towards Sustainable Living.

In a nutshell, having a savings plan will raise your awareness level and you can start saving consciously and regularly - by paying yourself first - and living within yours means which can make all the difference in your life. It’s never too early to start planning for your future.

Also see:

1. Savings: A Step Towards Sustainable Living

2. Hidden Flaws of Spending -Why do We make Fatal Money Mistakes

3. Hidden Spending Flaws : Individual Specific (Part I)

4. Hidden Spending Flaws : Individual Specific (Part II)

5. 10 Smart Tips for Making the Most of Section 80C


  1. Excellent Article; very knowledgeable and informative. Keep up the good work.

  2. Good article. Will keep coming back and also suggest freinds :-)

    Keep up the good work.

  3. Hi Fisher,

    Hope you are doing great!

    I always keep coming to this page and try to implement few things.

    I love the way you encourage people to go for savings for better tommorow.


  4. Thank you Vikram! It's so nice of you to drop by and leave a sweet comment.


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