Do you know how much to save?

You know that it is important to save from your income. You are aware that you need to save for buying a dream home or a car or for child’s education, their marriage and for your post-retirement period. You also know that savings can come handy in case of emergencies. However, what you do not know is how much to save to achieve all this?

Most of us are always in a dilemma as to whether our present savings will be adequate to fulfil our dreams? On the other hand, few rare species have a different dilemma. They worry whether their savings are more than required and thus are denying themselves from the pleasures of the present!!!

Estimating the right amount to save is the first task of any individual financial planning. This post will try to help you in determining your monthly savings to realise your goals in simple three steps.

First step is to prepare a list of goals which you have set for yourselves to achieve. Divide it into three time zones – 

• Short Term (1-5 Years)
• Medium Term (5 – 10 Years) and
• Long Term (>10 Years)

Also determine for which goals you need to start saving from today.

The next step is to determine the amount required (in today’s Rupee term) to achieve those goals.

With the help of the above inputs, the final step is to derive the monthly amount required to save and invest for each of your goals. You may use this file to calculate monthly savings for your goal. The file assumes an inflation rate of 5% and an average return of 12% on your investment. After incorporating the amount for your goal and the time horizon, you will get the monthly savings required to achieve your goal.

Now start investing the above amount every month. Discipline investing will help you to realise your goal timely.

An example to simplify the above.

Anil, age 25, is currently earning Rs. 60,000 per month. He expects his salary to increase 10% every year and he expect to continue his employment till the age of 60 years. He desires to purchase a four wheeler 3 years from today (short term goal). The cost of similar car today is Rs. 8,00,000. He also plans to purchase a vacation home by the time he is 45 years old (long term goal). He expects such home to cost Rs. 75 lakhs in today’s rupee term.

Incorporating the above information in our excel file shows that Anil need to save Rs. 12,500 per month for 3 years to achieve his goal to purchase a car and additional Rs. 20,120 per month for 20 years for his dream vacation home.

You may think saving Rs. 32,620 per month out of salary of Rs. 60,000 is substantial. But with salary increasing 10% every year, the percentage of saving will gradually come down from 54% at present to below 20% in 6 years and below 10% by 14 years. Still in case one is not comfortable with the high quantum of savings, it can be gradually increased as the salary increases.

Your comments and suggestions are welcome.