When we don’t save enough money in the short-term or the long-term, we are bound to struggle when it comes to covering an emergency home or auto repair, unexpected medical bills, or any other financial surprise, job and business loss may arise. Everyone needs to save money for future needs. In India; we don’t have a social security system. Most of the people are self-employed. Very few are working in organized sector hence need for saving. Plus, we all need a certain amount to cover any emergency like medical bills, collage fees or any other financial responsibilities.
How Much Money Should You Save to Fund Long-Term Goals?
As an advisor, I always tell my clients to save at least 20% of their incomes in the retirement account. Saving that much might seem higher, but this is what you need to do to prepare yourself for the harsh realities of today’s world. If you’re not saving for yourself and your own future, who is? Always try to increase your saving rate. Always do the mental accounting. Always save a certain percentage of income towards goals if financial planning has not been done in a formal way. Try to have a formal financial plan to know your financial goals, existing resources and whether you would be able to achieve them with the current saving rate or not.An easy way to do this is to boost your contributions incrementally over time – like 5-10% every year. Those extra funds will add up and grow your wealth in a big way. When it comes to cash savings, you’ll need to take a different approach. Since it’s easy to spend the extra money you have in your account, I always suggest having automatic monthly withdrawals shift over to long-term savings account on a regular basis. By paying yourself first – and making it automatic – you can grow your nest egg over time without being tempted to spend or waste your extra cash.
Long-Term Savings Plans that Make Good Financial corpus
Without a proper retirement saving corpus, you are destined to work longer than you want and struggle financially in old age. With plenty of money invested, on the other hand, you can potentially retire early, reach your lifetime goals, and retire with less stress and more peace of mind.
Beyond retirement though, you’ll need cash savings for all of life’s challenges – and life’s expenses. Here are some awesome long-term savings plans anyone could benefit from:
Long-Term Savings Plan 1: Pay Off high-cost loan first
While paying down loan isn’t necessarily “saving,” there are huge benefits that come from removing your high-interest consumer loans for good. While nearly any loan you have should be on the chopping block, you should start by focusing on high-interest credit card debt and personal loans first, then other debts like car payments and student loans because they have lesser rates comparatively. Regardless of which loan you need to take care, paying them off for good will help your finances tremendously. Without those monthly loan payments, you’ll have more money to save and invest each month.And with more capital available to save and invest, you’ll be able to grow wealth at a much faster rate. Plus, you’ll avoid the real wealth-killer on the table – credit card and debt interest payments you’re making.
Long-Term Savings Plan: Build Your Emergency Fund
When an emergency hits and you don’t have the money to cover it, it’s easy to wind up falling behind on your other bills, or worse, taking on new debt. The best way to avoid these problems altogether is to have an emergency fund to fall back on. Most financial advisors suggest keeping 3-6 months of expenses on-hand for emergencies, and I tend to differ. The emergency fund should be able to support your contingency
plan as and when the need arises. For this to work out, it is necessary that you should have the right mix of financial products in your emergency fund. Emergency funds should be a combination of both, your monthly expenses (say, three months’ expenses) and the amount which will be required in some kind of emergency. Such a fund should be easily accessible and have high liquidity. Liquidity refers to how quickly an asset can be converted into cash. Your house is not a liquid asset because it could take months to sell it. Stocks are somewhat more liquid than real estate, but you can lose money on stocks if you’re forced to sell at a time when the market is less than favorable. “Saving accounts, liquid funds, fixed deposits and short-term bonds are all good. Even though interest on liquid investments may barely keep up with inflation, the lower risk is worth the lower return when you may need the money quickly.
Long-Term Savings Plan: Save Up the Down Payment for a Home
Another long-term savings plan that can help you get ahead is saving up the down payment for your own home. Doing so can help your finances in more than one way. First, saving up a large down payment for a home can help you reduce the amount of money you need to borrow. And when you borrow less for your home, you’ll enjoy a lower monthly payment and pay less interest each month.
Long-Term Savings Plan: Save to Upgrade Your Vehicle
While you may already have a car you love, we all know it won’t last forever. If you’re looking for another long-term saving plan to get excited about, having a “new car corpus” is an additional option to consider.
By establishing this fund, you can save up for the inevitable – the day your car become old or the cost of repairs becomes prohibitive. With a car fund growing in the bank, you won’t have to stress when it comes to replacing your ride with a new or used vehicle.
Products for long-term saving
- Fixed Deposits are the safest and most hassle-free investment option wherein you deposit a fixed sum of money for a specified period of time and earn interest at a fixed rate of return. Most banks and financial companies offer FDs at various returns starting at around 7% rate of interest. There is no lock-in period in case of FD schemes and you easily withdraw money from your deposit by paying a minimum penalty in case you need the money urgently. You can also choose the frequency of interest pay-out from your FD depending upon your income requirements. It can be monthly, quarterly, half-yearly or yearly. You can even choose to re-invest the interest to receive lump sum interest after your FD matures. FDs are especially recommended for senior citizens, who get a higher interest, or those planning retirement. Fixed deposits offered by private sectors may also be considered. just make sure that highly rated and belong to established management.
- Personal Provident Fund (PPF) it is the safest and popular investment option in India. It is a government-backed long-term saving scheme that is a completely tax-free investment. The amount of money deposited in PPF is available as a deduction under section 80C of Income Tax Act; the interest earned on PPF is also not taxable. PPF may be opened in a bank or post office where your money gets invested for 15 years, which can be extended by another 5 years. There is a lock-in period of 5 years and presently, the PPF investments earn a compound interest at 7.90% p.a. You need to make a minimum yearly investment of Rs.500 and can make a maximum investment up to Rs.1,50,000.
- National Saving Certificate (NSC) NSC is the popular government-backed saving option that provides guaranteed returns with tax savings. A safe investment, you can invest in NSC at any post office for a period of five years. The interest rates on NSC is decided by the government and is reviewed every quarter. But the interest rate does not change during the tenor of NSC once your investment has been made. Presently, your investment in NSC yields returns of 7.90%, which is compounded half yearly. A minimum investment of Rs.500 can be made in NSC, without any maximum limit. The best thing is that you can claim tax deductions, but to the maximum amount of Rs.1,50,000 under section 80C. Keep in mind that the interest earned on NSC is taxable, so don’t forget to add the interest accrued on NSC to your total income while filing your tax return.
- Mutual Funds: You can also invest in mutual funds if you want to explore and benefit from equities and debts, which gives you an option to balance risk and return based on your preference. Investing in the share market through mutual funds is a safer option than making a direct investment in the stock market. You can consider starting a systematic investment plan (SIP), which is one of the best ways to invest in mutual funds by making small regular investments. This helps you earn better returns in comparison to other investment options.
- Equity Linked Savings Scheme (ELSS) As the name suggests, this mutual fund scheme helps in parking your investment in equity. ELSS are tax-saving mutual funds that allow a deduction up to Rs.1,50,000 under section 80C. It comes with a lock-in period of 3 years. You can earn higher returns by investing in ELSS since all the investments are made in the equity market that can help you beat inflation, but there is always a risk attached to investing in equity. An investment in ELSS can be made from as low as Rs.500 and there is no maximum limit on investment in these funds. It is wise to choose a combination of these investment options and schemes and spread your risk by investing in safe options like FDs and varying it with riskier options such as mutual funds. Being prepared for your financial well being and planning in advance is the right way to ensure that you and your family are prepared to deal with all kinds of financial contingencies.
While figuring out where to invest your long-term savings can be a challenge, there are plenty of different goals to save for if you really think about it. And with money in the bank to fund those goals, you’ll be in the best position to cover an emergency expense, retire earlier, and live the life of your dreams!
If you’re struggling to figure out how to allocate your long-term savings, don’t forget to sit down and create a list of short-term and long-term goals. Once you do, the right plan for your money will likely come together on its own.
Don’t forget – this is your life and your money we’re talking about. When it comes to how you should spend and save, there is nothing more important than your own goals and dreams!