8 Tips On How To Save Money From Your Salary Every Month
In the book “The Psychology of Money”, the author Morgan Housel shares the story of two individuals – a businessman and a janitor. Guess who was a millionaire at the time of his death? The answer may surprise many – the janitor. Despite earning significantly less than the businessman, the humble janitor was able to retire with a significant corpus.
While growing up, we are conditioned to find a good job and earn a monthly paycheck. When we develop money-earning skills, we are not equipped with the tools and skills – how to save money from a salary.
Does your bank account empty out within a few days of receiving your salary? Do you often grapple with how to save money from your salary every month?
Well, we can learn lessons from the humble janitor who prioritised savings and investing.
This blog offers ideas on getting started on this journey toward financial resilience.
How much salary should you save every month?
The more you save, the better it is. While you cannot compromise on essential needs, following the 50-30-20 rule is a good start. According to this rule:
- 50% of your salary can go towards essential needs such as rent, utilities, transportation, medicine, groceries, and clothing.
- You can budget 30% of your salary for your wants like salon visits, luxury purchases, and expensive vacations. While they may not qualify as essential needs, they may be crucial to your sense of well-being and fulfilment.
- Finally, utilise 20% of your salary to build savings and investments.
As you progress on your career path with higher income, you can increase the percentage that goes towards savings and investments, accelerating the growth of your corpus.
How to save money from your salary every month?
Saving money is not rocket science. Building constructive habits is the foundation for being more accountable in your financial journey. Adopting a few daily, monthly, and annual habits can increase your savings considerably and help you in leading a stress-free, financially stable life. Here are some concrete steps on how to save money from your salary every month.
Make a monthly budget plan
Many professionals keep wondering how to save money from their monthly salary. The first step is to identify how much money you can afford to set aside each month for savings. Creating a monthly budget can give you a realistic understanding of your expenses. This step will also help you understand how much is going towards needs, wants, paying off debt, and savings.
You can break down the budget into fixed monthly expenses such as house rent, utility bills, transport, groceries, medical expenses, and clothing. Then allocate the amount you will need to pay off loans and debt, and put it towards saving. Next, budget some amount for your wants such as eating out and entertainment. Lastly, keep a small amount for miscellaneous expenses. You may get the right budget later, but you can tweak it each month until you are satisfied.
Track your spending
Another critical step is to know how much you spend in each category daily. Small amounts add up to significant sums. You can download a money-tracking app and automate your expense-tracking exercise. However, you need to update it once a day. Over the period, the data generated on the app will give you insights into whether your budget needs to be recalibrated. It also helps you identify areas where you must control spending. For instance, you may realise that you are spending less on fruits and too much on eating out. Course correction is a natural consequence.
Cut down on your monthly expenses
As you become more aware of your realistic budgeting and spending needs, it is easy to understand how to cut down monthly expenses. For instance, you may decide to carpool with colleagues to cut down on petrol costs or go for a less expensive mobile and Internet plan and to reduce the number of streaming subscriptions. Cutting down gradually and consistently will reduce the discomfort.
Start automated savings
The best approach is to leverage technology to automate your savings and make it a habit. For instance, you can start investing by putting away as little as INR 500 per month in a mutual fund via a Systematic Investment Plan (SIP). The amount will get deducted every month from your bank account. Another option is to open a recurring deposit, which offers a higher interest rate than your savings bank account. Slowly, you can start automating all savings. Ensure that the amount is deducted a few days after the salary is credited. Alternatively, consider one-off investments as a lump sums in instruments such as fixed deposits, bonds, mutual funds, and stocks.
Also Read: Index Fund vs. ETF: What’s the Difference?
Invest in the right instruments
Here are some ideas on how to accelerate savings by making the right investments.
- Choosing the right investment vehicles depends upon your risk profile. For instance, if you are in your 20s, you can afford to take more risks with equity-based instruments. However, it is more important for senior citizens to safeguard existing investments and receive a monthly income.
- You can invest in equity via direct investment in the stock market, equity-based mutual funds, National Pension Scheme (NPS), and Index funds. You may want to consider investing in debt instruments via Fixed deposits, Public Provident Fund (PPF), government and corporate bonds, Post Office Savings, and the National Savings Certificate (NSC). You can also invest 5 to 20 % in Sovereign Gold Bonds (SGB), digital gold, or physical gold.
- It is essential to understand your risk profile and invest accordingly,
Pay off your debt
While it is essential to invest every month to build long-term wealth, it is equally crucial to pay off debts as soon as possible. This is an extremely important step toward how to save a monthly salary. As you pay off more debt, you will have more of your salary leftover to channel toward investments. This is because debt attracts interest rates that keep compounding with every delay in payment. Accelerating debt repayment must be your top priority.
- A rule of thumb is to pay off the debt with the highest interest rate. For instance, you have two credit cards. One has a larger principal, and the other has a higher interest rate. Paying off the card with the higher interest rate first is advisable, as it compounds faster.
- As you cut down your monthly expenses, channelise the surplus amount into paying off your debt.
- If you are paying off your home loan, try renegotiating the terms with your bank, especially if you consistently pay your EMI (Equated Monthly Instalment) on time. If you come into a large corpus, explore if you can repay a chunk of the loan and get a reduced revised EMI plan.
Reward yourself by celebrating debt repayment milestones in small ways.
Pay your EMIs on time to avoid penalty fees
You might be paying EMI on a home loan or if you have broken up a credit card payment into installments. It is important to ensure that the payment is made on time to avoid additional charges and penalties. Make sure that your bank account has adequate funds. There may be times when you are in a financial crunch due to various reasons. In this case, make sure to dig into your emergency fund. If you cannot make the payment for an extended period, make sure to inform your loan service provider, who might give you temporary relief. Communication with your bank and loan service provider is always the key to paying off your EMI and getting out of debt at the earliest.
Avoid making fancy purchases
Often consumers want a shiny new object that catches their fancy. They may want it even if they do not need it, which comes at a considerable cost. For instance, if you want to buy a car, research and buy one that meets your requirements and budget. However, consumers often buy a more expensive car because it looks good and is coveted by many. Such purchases come at a high cost, especially if one loses a source of income in the future. If you cannot pay for your purchases upfront, you should be cautious and choose a more affordable option.
Saving vs Investing: Key Differences
While both saving and investing help you accumulate wealth, the approach and outcomes are vastly different.
- The returns for savings are much lower, whereas investing leverages the power of compounding to grow wealth at an accelerated pace.
- Saving instruments comprise bank accounts, fixed deposits, and money-market instruments, whereas investing instruments comprise stocks, bonds, mutual funds, and ETFs.
- The time horizon for saving is one to five years, whereas for investing, it is more than 5 years. .
- Saving instruments are typically low risk and low reward, whereas investing can come with moderate to high risk but exponential rewards.
- Savings enables you to live comfortably within your means. In contrast, investments allow you to dream big and aspire for a more ambitious life and financial goals, including buying a home, funding a college education, and raising capital for a business.
Now that you have understood the tips on how to save money from a monthly salary, start incorporating these practices into your daily life. It may seem challenging in the beginning. You may take a break from budgeting and tracking your expenses on some days and months. However, once you start seeing the rewards reflected in your bank account, you will feel motivated to bring the best practices to your financial journey.
Why is it important to save money from your salary?
Saving each month is crucial to building a corpus fund for emergencies or retirement. It provides a financial cushion to ride out difficult phases in life when you may face income loss or sudden high expenditure.
How should I diversify my investments?
Your investment portfolio must have a mix of equity-based and debt-based instruments to balance the risk factor while creating opportunities for accelerated wealth creation. Investing in a combination of stocks, mutual funds, bonds, ETFs, fixed deposits, and a commodity such as gold will balance the portfolio.
How much should I save from my salary each month?
At the minimum, you must save at least 20% of your monthly salary. However, this is merely a good starting point. You can gradually increase the percentage of your salary going towards monthly investment to achieve your financial goals faster.
How much savings should I have at 25?
The savings you accumulate will depend upon what age you start working and what your income is. It is advisable to start saving right from your first job. A good benchmark is to put away 10% of your salary in savings each month and gradually increase it to 20%.
Is there any way I can automate my investments?
If you are constantly wondering – how to save your salary – then automation is the right approach. It is pretty easy to automate your investments. You can start a systematic investment plan (SIP) toward a mutual fund with a minimum investment of INR 500 per month.