“Someone’s sitting in the shade today because someone planted a tree a long time ago.” ~ Warren Buffett
Filling a bucket, one drop at a time – is a common proverb which is used to demonstrate the power of small but consistent efforts towards achieving bigger things in life. However, this proverb gets a whole new dimension when it comes to savings. The new dimension is the power of compounding that magnifies the power of savings over a period of time. Our financial success is not only determined by how much we save, but also by how soon we start to save. The example below demonstrates the power of small savings:
|Rate of Interest||Monthly Savings||Tenure||Amount Accumulated|
|10%||INR 1000||30 years||22.79 lakhs|
|10%||INR 5454||15 years||22.79 lakhs|
|20%||INR 2000||15 years||22.68 lakhs|
To By postponing our savings, we should not only start saving higher amounts but also aim at higher returns to match the corpus we would have built by making small savings.
Personal Finance Behavioral Trap to avoid : Do not postpone your savings to later date as it will only become more difficult with lesser time in hand. You can start small, but start today!
The important benefits of starting small savings are :
1. It teaches you Financial Discipline : Be an Ant Ants have an innate ability to store for future in smaller portions. To bring the parlance to saving’s, we can save large sums of money by starting early even if it is small and by staying the course. Ants achieve the impossible through “Discipline”, the trait which is hard to master especially in financial matters. The discipline it takes to stay on course is not easy, however once attained, it becomes a natural part of our routine. Taking baby steps like saving in small amounts since the initial earning phase ensures that one gets accustomed to this routine of saving. Making these savings at the start of month and designing the monthly budgets with the remaining income is a great way of managing our expenses. It induces the much needed financial discipline by allowing us to save for the future and live in our means in the present.
2. Becomes a Habit of Gain Not Pain Just like eating healthy or going to a gym, make savings a habit. We often postpone our savings by assuming we don’t have enough to save now and with a hope that we will have enough tomorrow. However, in reality, along with the income, our responsibilities of family care also increase over the time. Making higher savings during this time is a tough task. Increase in income is associated with increased expenditure rather than increased savings. Planning to save higher amounts during this phase when our expenses are higher increases the burden on our financial life. Starting to save in smaller amounts from the early days of our earning phase ensures that savings becomes a habit for us. Since the amount of savings is small, we don’t even feel the burden or need for major sacrifices in our lifestyle as well.
3. Winning is not dependent upon timing the market but time in the market In order to build the same corpus, person who postpones the savings would either need to increase the savings rate substantially or make higher returns. Higher returns comes with higher risks where the downside is high. Timing the market becomes an important aspect when we try to achieve high unrealistic returns. If history be observed, very few people have successfully been able to time the market and get substantially high returns. One should always rely on the time in the market rather than timing the market. The monthly savings should be invested through systematic investments. One should invest over a period of time at different market levels. By doing so, we not only avoid timing the market but also benefit from the “cost averaging” in long run.
Another great example to demonstrate the power of small savings is our PF contributions. PF contributions are deducted on a monthly basis and saved. We don’t even feel the pinch or burden of this and accumulate a substantial corpus for our retirement. Starting early and saving 10% of income at 10% interest rate is always beneficial than starting late and saving 20% of our salary aiming a 20% return.
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