The quiet, unglamourous act of saving more each month is far more powerful in accumulating wealth.
There is of course a trade-off in spending for enjoyment in the near term but the point is more about striking a balance that can give you an advantage in building a larger corpus.
Meet Rahul and Anjali. Rahul is obsessed with high returns – spends hours trying to beat the market. Anjali, on the other hand, keeps it simple. She is simply more mindful of opportunities that can help her save more.
Over a ten as well as twenty year period, despite Rahul earning better returns, Anjali ends up with a larger corpus. How? She has put more money to work earlier and let the magic of compounding work.
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Sure, Rahul will also benefit from compounding and may even have a larger corpus than Anjali eventually but it will take a much longer time frame to get to his goals assuming it is similar. As investors, this can have a significant impact on our wealth creation journey. We ran some numbers to see the impact of increasing your savings versus earning a high return can have in your wealth creation journey.
Past performance may or may not be sustained in future and is not a guarantee of any future returns. Please note that these calculations are for illustrations only and do not represent actual returns.
Mutual Funds do not have a fixed rate of return and it is not possible to predict the rate of return. The monthly savings increase by 7% each for both Rahul and Anjali, reflecting 7% increment.
For instance, 10,000 per month in the first year, 10,700 from second year, 11,449 from third year and so on.
Similarly, for Anjali, the monthly contributions are: 20,000 in the first year, 21,400 in second year, 22,898 in third year and so on.
The table shows the impact of saving from a salary of 1 lakh per month with an annual increment of 7%.
In the Base Case, Rahul saves 10% of his monthly salary and earns an annual return of 6%. After 10 years, Rahul’s corpus grows to approximately 21.73 lakhs, and after 20 years, to 81.67 lakhs.
In the Double Returns scenario, Rahul’s savings rate remains at 10%, but the returns double to 12%. This leads to an increase in Rahul’s corpus: about 28.80 lakh after 10 years and 1.46 crore after 20 years. This demonstrates the power of compounding at higher returns.
In the Double Savings scenario, Anjali saves 20%, a conservative investor content with 6% return. Here, her corpus grows to 43.46 lakh after 10 years and 1.63 crore after 20 years—surpassing even Rahul’s corpus after 20 years.
The difference between Rahul and Anjali’s portfolio over 20 years is 17 lakh, even at a 6% growth rate for Anjali while Rahul’s portfolio grew at 12%. This shows that saving more can have a potentially better outcome even if the growth rate is less.
Higher returns may or may not be achievable – it’s not in your control. But what’s in your control is how much you can save. In the early years of your accumulation journey, it’s essential to look for ways to increase your savings rate and once your corpus becomes sizeable, focusing on generating higher alpha can have a multiplier effect on the portfolio.
This comparison underlines two critical financial lessons: while higher returns can accelerate growth, saving more consistently has an even stronger impact over time, especially when combined with long-term investing.
Here are some ways to save more. Since everyone’s financial situation is unique, you can adopt one or a combination of these hacks to increase your savings.
Remember that much of this needs some willpower which many may claim they have but as humans we all do also succumb to our environment.
Therefore, the biggest insight I would recommend one should work on is to use default options and automated features rather than the ones that require will power.
The below is a random list of strategies to consider. If I were to recommend one to start with, it would be to not just sign up for doing a SIP (which is a fantastic automated feature that helps you save and invest ), but to sign-up for a Top-up SIP, which helps you automate the aspect of saving more.
• Set a higher savings rate target.
• Track your discretionary spends.
• Try a no-spend weekend. Consider playing a sport, reading, or walk.
• Aim to reduce your high interest debt like credit card bills.
• Defer impulse purchase decisions by taking more time to decide.
• Refinance your loans by switching to alternative banks to save interest cost.
• Make a shopping list before stepping out to avoid impulse purchases.
• Consider cancelling unnecessary subscriptions that are not fully utilised.
• Sign up for Step Up/Top-Up SIPs to nudge yourself to saving more.
• Plan your major purchases to look for annual/seasonal/festival discounts.
• Lower your travelling cost by considering ride sharing options or public commute, if feasible.
• Make smart use of your yearly bonus or sudden wealth to cut down debt/prepay loans, save for emergency expense, and investing in growth assets like equities to compound your wealth.
• Retirees can consider moving to smaller cities/towns to benefit from lower housing costs, reduced commuting expenses, and generally lower overall cost of living.
• Retirees may consider downsizing their home to reduce overall costs related to municipal taxes, electricity bills, general upkeep, etc.
• Claim tax deductions and exemptions wherever applicable. Stagger your withdrawals through SWP to avail 1.25 lakh tax exemption from equity funds.
• Save more money as your incomeincreases.
• Cooking your own meals at home can be a great way to save and at the same time eat healthy.
There are many more ways to save but you can adopt your own measures as per your circumstances without being frugal and at the same time enjoy time with your friends and family.
Taking guidance from a trusted advisor can help you prioritise your goals and set on a path towards financial freedom. Summing up, your savings rate not your investment return is the true engine of wealth creation, especially in the early years of your financial journey.
(The author is CEO of PGIM India Mutual Fund)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
