If you do not consider yourself to be a saver, you have a serious financial problem looming up ahead of you. Don’t fall for the misguided notion that because credit is so easily available and because you have a nice well-paying career ahead of you, you don’t have to make this a priority.
Here are some insights from various experts on the importance of, and various facets of savings.
1) Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
Fortunes can be blown as fast as they’re earned – and often are – while others with modest incomes can build up a fortune over time.
Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income but have no chance without a high savings rate, it’s clear which one matters more.
A high savings rate means having lower expenses than you otherwise could, and having lower expenses means your savings goes farther than it would if you spent more.
Morgan Housel - Read entire post here
2) The more you save earlier on, the better it works out.
The unfortunate reality is, just kind of the mathematics of the compounding.
If you had a couple of thousand rupees and you earn an extra 1% of returns, an extra 1% of return on a few thousand rupees won’t get you far. It doesn't have a big impact because the account balance just isn't as big yet. But if you've got hundreds of thousands in savings already, a 1% change in your returns could be a year or two worth of savings, all at once.
Creating the savings habit is overwhelmingly, dominatingly the biggest factor that drives the outcome.
Those that allow their lifestyle to creep higher over time, means that they are saving a little bit less and because their spending is moving up as their income moves up. And, they now need more in order to retire because the lifestyle has gotten more expensive. This means they've got further to go on this journey.
You say, I'm making more money. I'm going to upgrade a little. I'm going to get a nicer car. The expenses start creeping up. Once it becomes a part of our lifestyle, it's hard to go backward. I used to mow the lawn, but now I got a little more money. So, I'm going to pay someone to mow my lawn. Once I pay someone to mow my lawn, I rarely go back and mow lawn again.
We do it with cars. We do it with houses. We do it with a lot of kind of lifestyle maintenance-oriented things.
Michael Kitces - Read entire post here
3) Thinking about the future helps
A study conducted by Morningstar found that people who think further into the future tend to save more frequently and build larger savings balances. This effect is significant even when one looks at other factors such as income, age, gender, and education.
Among those who think several years ahead, or in other words, long term, even if they are in the lowest income group, had savings habits that rivalled short-term thinkers in the highest income group. These habits included saving from every pay cheque, saving up for large purchases, saving for long-term goals such as buying a home, and saving for retirement.
Take stock of your mental time horizon. How far ahead do you tend to think and plan? A few weeks? Months? Years? Your day-to-day decisions will be deeply affected by your mental time horizon. Mental time horizon and clarity of one’s picture of the future may even reduce the effects of impulsiveness on financial behaviour.
Sarah Newcomb - Read entire post here
4) It’s never too late to start saving
The best time to save for a pension is 30 years ago; the second best is now. Twenty years from now, you will wish you had started saving 15% of what you earned to feel confident enough of controlling of your financial future. Don't be afraid to start saving 15% of your income today. Your future self will thank you enormously.
Remember that your savings – not your income – will determine your financial freedom.
Budgeting and saving to pay down debts is important. Even those who save tend to do so with a large item or house deposit in mind; fewer than one in five are saving for retirement.
Robert Gardner - Read entire post here
5) Take human capital into account
Human capital is the vital link in the overall financial path towards growing one's wealth.
When it comes to looking at wealth creation, people must look at financial capital (tradeable asset such as stocks and bonds) as well as human capital. Human capital is an individual's ability to earn and save. Human capital is measured by the present value of all your expected future wages, including pension and social securities.
For instance, a university professor has a stable income. The chance of him or her losing their job is remote. Therefore, they have the ability to have a more aggressive investment portfolio.
On the other hand, a professional football player does not have the same secure income that lasts their entire working life. Hence, his investments need to be more stable and defensive. He needs to ensure that he has a sensible investment plan at the start of his football career that would put him and his family onto a stable financial path.
Chris Galloway - Read entire post here
This post initially appeared in Moneycontrol.com
