Worry about your savings rate than the returns

We are all interested in getting high returns for our investments.  We keep looking at our portfolios to see the latest return!!

From a financial fitness viewpoint, for each of us, there is a number which is even more important What is our yearly savings rate?  This is a ratio which measures the % of income which we manage to save each year.  For e.g. If someone earns Rupees five lakhs a year and they have managed to save Rupees fifty thousand, they have saved 10% of their income.

Average household savings rate in India

In March 2019, the Reserve Bank of India (RBI) gave data about the household savings rate in India – It was 17.2%for 2017-18. This is above the OECD household savings rate of 8%, but below the 30% + savings rates of China.

However, the trend over this decade is alarming. Savings rates have dropped from 23% in 2011-12 to 17% now.

Let us look at this data in more detail and understand it’s importance.

Why is savings rate so important?

• Builds long term wealth – If you can maintain your savings rate over time, the additional wealth generated is huge.  Let us consider the above seven-year period (2011 to 2018).  If a family had maintained the original 23% savings rate, their corpus would be 19% more than a family which would have dropped their savings rate.  For a 20k per month saving, that is a difference of 5 lakhs in just 7 years!!
• Strong focus on long term goals– When we focus on maintaining our savings rate, the savings options are for the long term, which aligns very well with our goals (e.g. Retirement, children’s goals)
• Automatic step up in Savings – If we go ahead with a constant savings rate approach, our annual savings goes up regularly. We often see many investors, who retain the same savings amount each year. But with a 10% increase in the savings each year, over 20 years, we can save double the final corpus
• Curbs Discretionary spends and loans – With an increase in salary, there is always the temptation to splurge on discretionary items (bigger car, gadgets, vacations etc.).  A constant savings rate goal ensures that you save more first, before we spend
• Savings rates are in our control – Wealth generation is a function of how much we invest and the returns we get on those investments. The returns are not always in our control.  However, we can control how much we save, which helps us build the necessary corpus for our goals

Summary

We should measure and monitor our savings rates.  Too often, our focus is on the returns from our investments.  Having a savings rate goal shifts the focus towards saving more in a disciplined manner.  While we should strive for higher returns, saving more on a regular basis is a less stressful way of saving enough money for our priority goals.